Private Portfolio Attribution Analysis

Abstract

There are many methods for conducting performance attribution with portfolios containing only liquid assets. A lack of periodic asset return data and a clear definition of what constitutes an appropriate market benchmark thwarts efforts to perform similar types of attribution analyses for portfolios of private equity funds (and other illiquid investments). In this article, the authors propose a method for decomposing private fund portfolio performance into effects from timing, strategy selection, geographic focus, sizing of fund allocation, and fund selection attributes. They test the method with a simulation study and derive approximate confidence intervals for assessing attribute selection skill using a large historical dataset of buyout and venture capital funds.

Key Findings

• ▪ The method provided for evaluating the value created from decisions about the timing, size, geography, and asset class of private fund commitments in this article also provides a residual component. Analysts and investors can interpret this component as value-added by fund selection.

• ▪ The method provides intuitive estimates in terms of contributions to return multiples (MOICs) and IRRs.

• ▪ The authors conduct a simulation study using a large sample of private equity buyout and venture capital funds to estimate approximate confidence intervals for each allocation characteristic. Practitioners can use these intervals to statistically separate skill from luck.