Dr Ludovic Phalippou of Saïd Business School, University of Oxford, has cited the Yale endowment fund as being famous for high annualised returns of 30 per cent that it makes from its aggressive commitment to private equity.
Phalippou, however, has called for investors to “look beyond the headline figures at what lies behind them”. He added: “We often read of the spectacular gains achieved by private equity, but the way the private equity industry reports performance can grossly exaggerate the true numbers.”
He claims that there is a gaping divergence between the returns found by academic studies and the performance reported by fund managers within the industry, who clearly have a vested interest for investors to allocate to private equity.
“Academic studies present a different view, showing that taken all together, private equity funds had returns comparable to those of public equity,” he said, adding that the disparity comes down to the use of different methodologies.
Phalippou’s answer is to apply a one-size-fits-all approach that allows investors to compare different asset class returns fairly.
This is not the first time that private equity performance measures have taken flak. In July last year ex-Morgan Stanley banker Peter Morris denounced the use of IRR and the assumption that LPs’ cash is invested at the same compound rate throughout the whole life of a fund.
According to Morris: “The most widely used measure, the IRR, is misleading and often overstates realised returns. This creates room for uncertainty, at best, and, at worst, manipulation.”
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