Friday, May 27, 2011

Valuation and Return Measurement in Private Equity: An Overview

© 2011 INSEAD Case Study

The topic of valuation and measurement of return (i.e. investment success) permeates the whole life cycle of private equity (PE). While the valuation part is in many ways similar to other direct investment strategies, the measuring of returns in private equity is a notoriously difficult business, mainly due to the absence of an efficient and transparent market for the asset class. So while theoretically not difficult, the wide range of practical approaches – often designed to produce a specific outcome – tend to be confusing to an outsider or new student of the field. This paper does not attempt to systematically explore all the variations that exist in the market but rather to give an overview of the most common approaches, highlighting their strengths and weaknesses and pointing to major alternative methods.