As more asset owners shift from the traditional 60/40 model to a more diversified 40/30/30 allocation, many discover that measuring the performance of alternative investments raises a host of unique obstacles.
Exploring solutions to this challenge specific to private equity (PE) investments was the focus of the recent webinar, “Beyond IRR: Performance Measurement in Private Equity – Don’t Get Left Behind.”
In the webinar, experts discussed key challenges and notable nuances in metrics, data management, benchmarking, and reporting.
In this blog post, we take the conversation one step further, highlighting the main points and addressing attendees’ top questions.
Internal Rate of Return – Evaluating Private Equity Performance Effectively
To start the webinar, the panel set the foundation, explaining that private equity involves long-term, illiquid investments, with capital committed upfront and drawn down over time. Unlike public equity, which is marked-to-market daily, PE relies on quarterly valuations based on models and assumptions.
Performance is measured using money-weighted returns like internal rate of return (IRR), which accounts for the timing of cash flows—critical in PE. Public equity uses time-weighted returns (TWR), which are unsuitable for PE due to its irregular cash flows and lack of liquidity.
IRR, the discount rate that sets the net present value of all cash flows to zero, is a cornerstone metric for evaluating investment-level PE performance, but its effectiveness depends heavily on context. IRR reflects both when and how much capital is invested or returned, making it a powerful tool for assessing manager decision-making in private equity.
That said, when webinar attendees asked whether IRR can be used to compare managers or strategies, the panelists cautioned that it rests on valuations that are often subjective rather than marked-to-market, along with several other underlying assumptions. As a result, IRR can distort comparisons across funds with different cash-flow patterns or multi-asset portfolios.
In some cases, unusual or non-linear contribution and distribution sequences can even produce multiple IRRs, and Modified Dietz or other alternative metrics may provide clearer insights.
Another common question focused on interpreting IRR across vintages or strategies with different cash flow profiles. The panelists stressed that direct comparisons are only meaningful if cash flow patterns are similar.
Otherwise, IRR should be used in conjunction with complementary measures—such as multiples of invested capital, TVPI, DPI, and RVPI—to provide a more comprehensive picture of fund performance. Metrics like TVPI, DPI, and RVPI complement IRR to provide insight into distributions, residual value, and total fund performance.
In short, IRR is a critical part of evaluating private equity, but it should be one of several tools in an investor’s toolkit, applied thoughtfully and in the right context.
Benchmarking & Reporting – The Right Profile
Benchmarking private equity performance can feel more like an art than a science. Unlike public assets, private funds are illiquid, manager-driven, and report returns differently across vintages and strategies. How do you find a comparison that fits?
Webinar attendees had several questions about best practices. One asked whether using a simple weighted average is appropriate for benchmarking private investment allocations within a total portfolio. Another attendee asked whether it is best to report only since-inception returns, or if non-since-inception returns, such as 1-year or 3-year, are useful to clients.
The panelists stressed that benchmarks provide context rather than exact comparability. Public market equivalents or peer groups can help frame performance, but timing, cash flow patterns, and fund-specific nuances must be considered.
GIPS® standards for performance reporting also emerged as a hot topic. Attendees asked whether using Modified Dietz instead of IRR is acceptable for private equity, how common it is to track embedded leverage for reporting returns with and without leverage, and how IRR expectations differ for fund-of-fund managers.
Panelists emphasized that transparency and consistency are crucial: Clearly documenting assumptions, adjustments, and methodology enables investors to make informed comparisons across managers and funds.
Time-Weighted Return – Seeing the Whole Portfolio Picture
Webinar attendees were keen to explore evaluating private equity performance within a multi-asset portfolio to understand how those private investments contribute to total portfolio performance.
Time-Weighted Return (TWR) is the standard for total portfolio reporting because it isolates the impact of manager skill from the timing of cash flows, which are often outside an advisor’s control.
One RIA employing a manager-of-managers approach asked about a single comprehensive return figure for their portfolio, including private equity, and asked whether IRR or TWR should be used. The panelists emphasized that TWR is generally preferred for total portfolio reporting because it allows consistent comparison across public and private assets.
While IRR remains essential for evaluating private equity manager decisions, it can distort results when aggregated at the portfolio level due to cash flow timing and magnitude.
Attendees also raised the classic J-curve question: Should investors worry about the early-stage dip, assuming it smooths out over time? Panelists agreed that returns often stabilize over a fund’s life, but understanding the early impact of the J-curve is critical for client communication and setting realistic expectations.
One attendee asked about the correlation between public and private equity performance. The panelists explained that research generally shows a 60 to 80 percent correlation between the two, since both are equity. However, differences in liquidity risk and timing require distinct approaches to performance measurement: Private equity typically uses a money-weighted rate of return, while public markets rely on a time-weighted rate of return.
Creating a Holistic Picture of Private Equity Performance
As attendees of the webinar learned, measuring private equity performance is inherently nuanced. It's not about finding the perfect metric, but about choosing a consistent, defensible framework that aligns with strategy, vintage, and investor expectations.
Achieving a holistic view of a 40/30/30 portfolio requires a sophisticated performance measurement system to capture the intricacies of each asset class, including private equity investments. This system should track current value, committed capital, capital drawn down, distributions (in both cash and stock), and fund-level expenses.
Learn More
To experience the full discussion and deep dive into private equity performance measurement, watch the recording of “Beyond IRR: Performance Measurement in Private Equity – Don’t Get Left Behind,” featuring performance experts from TSG and SS&C Advent.
Read about the award-winning SS&C Sylvan and its comprehensive performance measurement and attribution capabilities. Or contact us to learn more about measuring private equity.
