The Truth About Private Equity Performance

Rising credit costs have already taken the bloom off private equity’s rose, but some funds (and some investors) are due for another shock. Our research shows that the way PE fund performance is most often reported overstates the truth. Here’s the problem: Private equity returns are often reported as the internal rate of return (IRR)—the […]

by

Oliver F. Gottschalg

and

Ludovic Phalippou

by

Oliver F. Gottschalg

and

Ludovic Phalippou

From the Magazine (December 2007)

Summary.

Reprint: F0712D

Private equity fund performance is most often reported in a way that exaggerates the truth. A modified calculation gives a more accurate read of performance and can change a fund’s relative rank.

Rising credit costs have already taken the bloom off private equity’s rose, but some funds (and some investors) are due for another shock. Our research shows that the way PE fund performance is most often reported overstates the truth.

A version of this article appeared in the December 2007 issue of Harvard Business Review.

OG

Oliver F. Gottschalg (gottschalg@hec.fr) is an assistant professor of strategy and business policy at HEC School of Management in Paris.
LP

Ludovic Phalippou (l.phalippou@uva.nl) is an assistant professor of finance at the University of Amsterdam Business School. The full paper describing this research is available at www.buyoutresearch.org.

The Truth About Private Equity Performance

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