In PE, Getting ‘Birds-of-A-Feather’ to Flock Together Isn’t Always Easy

In a fundraising environment where LPs are looking to make bigger commitments to fewer managers, a firm’s relative standing really matters. Up until now, identifying competitors in PE has been a highly inaccurate process of grouping GPs together according to “vintage year.” Doing so groups together very different funds in terms of characteristics that really matter – like investment focus and size, while failing to account for market dynamics that might affect consecutive vintages differently. The vintage year groupings have always been viewed by LPs as subjective and likely biased.

So what can be done about it? PERACS has developed a Relevant Competitor Benchmark (“RBC”) that accounts for the various biases and inaccuracies inherent in the vintage year criterion by developing a method by which PE funds can identify and benchmark against their relevant peers. PERACS’ methodology empirically identifies funds that compete directly with a given GP for the same investment opportunities in order to objectively capture funds active in the same space within the PE universe.

How does this work? PERACS works off a concept of Strategic Cells. It collects a data set on fund-level performance and investment activity (individual deals) of a large sample of PE funds. Strategic Cells are created through a combination of a given:

  1. Industry sector
  2. Region
  3. Investment time period
  4. Size

The next step for PERACS is to identify within the strategic cell the Relevant Competitor Funds.[1] First, PERACS calculates the Strategic Overlap Score by measuring the percentage of activity (investment volume and # of deals) of fund pairings in each strategic cell and the sum of the joint activity of these fund pairings across all strategic cells. A score of 1 means that a firm invests exactly like the average firm; a score of 0 indicates that no other firm makes similar investments.

Based on the Strategic Overlap Score, comparable funds can be benchmarked against one another. Funds are considered comparable when their Strategic Overlap Score (by investment volume) exceeds 15%.

Finally, a fund can be benchmarked against its most appropriate competitors by using PERACS’ Relevant Competitor Benchmark (“RCB”). The RCB for a given fund is the average performance of all its Relevant Competitors Funds, weighted by their Strategic Overlap Score.

Example of PERACS’ methodology[2]:

Fund to be benchmarked: Large Cap European Fund, Vintage Year 2000

List of relevant competitors (by order of strategic overlap):

  • BC European Capital VII VY 2000
  • Third Cinven Fund, The VY 2002
  • Blackstone Capital Partners IV, L.P. VY 2003
  • Cient European Equity Partners III LP VY 2001
  • KKR European Fund VY 1999
  • Hellman & Friedman Capital Partners IV, L.P. VY 2000
  • Charterhouse Capital Partners VI VY 1997
  • Carlyle Europe Partners, L.P. VY 2003

[1] Proprietary – US Patent Pending

[2] Based on Thomson Reuters data, 2011

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