1. PERACS METRICS

PERACS provides industry professionals with a common verifiable set of measurement tools enhancing investment decisions.

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2. ENHANCED PERFORMANCE MEASUREMENT

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3. RELEVANT PEER BENCHMARKING

Existing vintage year benchmarks are of limited accuracy as the traditional criterion group funds with very different investment focus and do not account for market dynamic where funds with similar focus from consecutive vintages compete for similar deals and LP commitments.

The PERACS Relevant Peer Benchmark is an innovative Private Equity performance metric based on empirically-derived funds that directly compete with a given GP for investment opportunities in order to objectively capture funds active in the same space.

PERACS generates a competitor peer set by analyzing the underlying portfolio of a GP and comparing those deals with similar deals done in the PE space as defined by size, geography, sector, and investment time period to determine which funds were really competing for similar deals to that GP.

  • An objective data-driven algorithm that identifies Relevant Peer Funds
  • Based on the similarity of a fund’s actual investments across time, geography, size, and industry
  • An independent set of peers is customized for each fund
  • Addresses the limitations of vintage year peer methods that group funds with different investment focus and timing

A comparison of performance (fund-by-fund) to the aggregate performance of the “relevant peers”  provides key insights into two distinct GP skills:

  • High Relevant Peer Benchmark = Superior Target Choice
  • Fund beats Relevant Peer Benchmark= Superior Execution / Implementation

4. VALUE CREATION

Calculating the “strategic overlap score” between two PE funds

  • Measure the percentage of activity (based on the investment volume and the # of deals) in each “strategic cell” for each PE fund;
  • Calculate the ‘strategic overlap’ for each pair of PE funds as the sum of joint activity (i.e. the minimum of the percentages invested in a given strategic cell by both funds) over all strategic cells;
  • A strategic overlap of “1” means that a GP invests exactly like the average PE firm – a score of “0” indicates that no other firm makes similar investments.

Identification of relevant peer funds based on “strategic overlap score”

  • “Comparable” funds that should be benchmarked against each other can then be derived as a function of the “strategic overlap score”;
  • For example, we consider funds as “Relevant Peers” whenever their “strategic overlap score”(by investment volume) exceeds 15% – and consider the degree of “competitive overlap” in the calculation of the benchmark.

The “Relevant Peer Benchmark” (“RPB”) for a given fund is the average performance of all its “Relevant Peers”, weighted by their “strategic overlap score”

5. STRATEGIC UNIQUENESS

The PERACS Strategy Evaluation Metric analyses a GP’s portfolio to demonstrate relative to the PE universe:

  • the uniqueness of their strategy
  • how pro-cyclical or counter-cyclical it is
  • how consistent their strategy is by country, by size, and by industry

This metric is the refined outcome that determines the “Fitness Score” of the HEC-DowJones PE Fitness Ranking. It offers the possibility to compare the strategic investment approach of a given firm with its closest competitors

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6. RISK MEASUREMENT

The PERACS Risk Curve captures the distribution of PERACS Alpha performance within a portfolio of deals in a single measure. It shows the dispersion of returns in a portfolio compared to any relevant benchmarks

The Risk Coefficient makes it possible to compare and benchmark:

  • Manager risk to an overall portfolio, sub-asset class, and geography
  • Create a reward-risk trade-off matrix

This methodology gives a measure of risk for a GP that can be compared over time and to a benchmark(s) as opposed to the traditional method of calculating a simple “loss ratio”.

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