measuring returns in private equity-30511

8/2/2019 Measuring Returns in Private Equity-30511

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Measuring returns in Private Equity1

Measuring returns in Private EquityConcepts, historical evidences and impacts on portfolio constructions

PierreYvesMathonet

Luxembourg, 3 May 2011

Sacred Heart University Luxembourg CFA Institute


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EIF at a GlanceAaa/AAA/AAA ratings (Moodys/S&P/Fitch)Multilateral Development Bank (MDB) status

EIB specialised institution for SMEs, risk financing

Venture Capital and Mezzanine (fund of funds)

Structuring and Guaranteeing portfolios of SME

Microfinance loans/leases and equity

Staffing, Culture and Values

Leading-edge modern institution

Adapting to changing market conditions

Attracting talented staff

High standards of compliance and integrity

Authorised Capital 3bn

EIB: 62%EC: 29 %

Fin.

institutions: 9 %

To be issued: 1%

Geographic Focus /IntermediariesEU 27, EFTA,

Candidate Countries



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Early stage Later stagePublicequity

VENTURE CAPITAL

Buyout &Mezzanine

Start-up

Stage

SeedStage

Techtransfer,

incubators

BUYOUT & MEZZPUBLIC

EQUITY

Public toPrivate

& PIPEs

Expansion

Stage

Broad landscape but not in all countries/regions.

PE market landscape



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Success Stories Funded by EIF

http://www.biovex.com/


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Private Equity Return and Risk vs. Other Asset

Classes Using Public Indices

Return potential: the primary benefit of Private Equity is return enhancement. Based on listed Private Equity

indexes, Private Equity is a high return asset class, with a high Sharpe Ratio but it is also high risk.

However, because Private Equity is by definition an unlisted asset, listed Private Equity may not be

adequately representative.

Private Equity data are in general of poor quality and cannot be

easily compared to public equity (or other

asset classes) without modifications and biases corrections. Based on historical data, available research

does not draw definitive conclusions of the over or under-performance of Private Equity vs. public equity.

Annualised Statistics (1993-2010) Asset Class Mean Std. Dev. Sharpe

FED Federal Funds Target Rate US US Risk Free 3.60% 0.00% N/A

ESTX Euro Stoxx 50 Pr European Stocks 5.71% 19.53% 0.11

SP500 S&P 500 INDEX US Stocks 6.96% 15.67% 0.21

RU2000 RUSSELL 2000 INDEX US Small Caps 8.50% 20.14% 0.24

NASDAQ NASDAQ COMPOSITE INDEX US Technology 10.66% 25.30% 0.28

JPMUSB J.P. Morgan U.S. Aggregate Bond US Inv.Gr. Bonds 5.89% 9.91% 0.23

MSCIW MSCI WORLD World Stocks 5.45% 15.55% 0.12

LPX50TR LPX50 Total Return Global PE & VC 9.90% 25.04% 0.25

LPXETR LPX Europe Total Return European PE 10.63% 21.60% 0.33

LPXVTR LPX Venture Price Index Global VC 6.45% 29.18% 0.10

* Bloomberg data to 31 November 2010


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Private Equity Return Fund Cash-flows andResidual Values

Private Equity Funds normally have during their first years negatives cash-flows, i.e. Draw-downs or

Paid-ins, followed by positive cash-flows, i.e. Distributions or Reflows and, when the Fund is not yet

liquidated, its remaining value, i.e. the NAV (or Fair Value) which is used as a terminal positive cash-

flow to measure the Fund performance.

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

1 2 3 4 5 6 7 8 9 10 11

Year

Paid-ins

Distributions NAV


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Private Equity Key Performance Measures

IRR - Internal rate of return - measures the efficiency

In a Private Equity fund, the net return earned by investors from the funds activity from inception toa stated date. The IRR is calculated as an annualised effective compounded rate of return, using

monthly cash-flows and annual valuations.

TVPI - Total Value to Paid-In - measures the effectiveness

TVPI is the sum of the DPI and the RVPI. TVPI is net of fees and carried interest.

This is also often called the multiple.

DPI - Distribution to Paid-In measures the paid (i.e. certain) portion of the effectiveness

A measure of the cumulative distributions returned to the limited partners as a proportion of the

cumulative paid-in capital. DPI is net of fees and carried interest.

This is a relative measure of the funds realized return on investment, also often called the cash-on-

cash return.

RVPI - Residual Value to Paid-In measures the unpaid (i.e. uncertain) portion of the

effectivenessA realisation ratio which is a measure of how much of a limited partners capital is still tied up in the

equity of the fund, relative to the cumulative paid-in capital. RV/PI is net of fees and carried interest.

This is a relative measure of the funds unrealized return on investment.

Source: EVCA Glossary.

0

110

n

i

n

n

n

i

n

i

IRR

NAV

IRR

CF

nnnRVPIDPITVPI

n

i

i

n

i

i

n

inPaid

Dist

DPI

0

0

n

ii

n

n

inPaid

NAVRVPI

0

Private Equity performance is traditionally assessed using one of the four measures mentioned in this slide. Each

measure has its merits (e.g. assessment of the efficiency), but each also has its drawbacks (see next slides).

Normally performance is best measured net of fees and carried interest but gross performance are also normallyreported. The IRR (Flows) and XIRR (Flows, Dates, Guess) functions of Excel make it easy to calculate an IRR.


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Limitations of The Key Performance Measures

Private Equity classical performance measures (IRR, i.e. cash-flow-weighted rate of return) differ from

the measures traditionally used for other standard asset classes

(time-weighted rate of return or

TWRR), making not only comparisons but also portfolio construction more difficult.

In mutual funds, the investor is responsible for the timing of cash additions and withdrawals, with animmediate and full change in exposure. This makes the TWRR more relevant.

In Private Equity, the GP is responsible for calling and distributing capital with a delayed and partial

change in exposure. This makes the IRR more relevant.

The only ways to make the IRR and the TWRR comparable is to revalue the investment at the time of

each cash-flow, which in the case of Private Equity is proven to be problematic or to use the PublicMarket Equivalent approach.

The IRR, which may have multiple correct mathematical solutions,

makes a reinvestment assumption,

which in some cases may not be realistic and if removed may have

a significant impact on the total

program return.

Between the inception and the termination of a Private Equity fund, its interim returns follow the so-

called J-curve pattern reducing the relevance of early performance figures (see slide #10).

The best suited performance measures for Private Equity funds (i.e. IRR) make direct comparison

with other asset classes (normally measured with a TWRR) and portfolio construction difficult.


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Reinvestment Assumption - Modified IRR

Modified IRR: IRR calculated taking into consideration the investors cost of capital and

reinvestment opportunities. The modified IRR removes the assumption that positive cash

flows are reinvested at the same rate of the fund that generated them.

Assumptions

Cost of Finance = 5%

Reinvestment Opportunity=12%

Fund 4

Net IRR = -15.9%

Modified IRR = -8%

Fund 7

Net IRR = 164.9%

Modified IRR = 19%

Fund 9

Net IRR = 33.3%

Modified IRR = 20%

Fund 7: Net IRR=164.9% MIRR=19%

(20,000,000)

(10,000,000)

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

PV of Negative Cash Flows FV of Positive Cash Flows

Fund 7: Net IRR=164.9% TVPI=2.6x

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13

Paid-in in EUR Distributed in EUR


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J-curve

-15%

-10%

-5%

0%

5%

10%

15%

0 1 2 3 4 5 6 7 8 9 10

Years

IRR

J-curve: the curve generated by plotting the returns generated by a private equity fund against time (from inception to

termination). The common practice of paying the management fee and start-up costs out of the first drawdowns does not produce

an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realisations aremade, the fund returns start to rise quite steeply. After about three to five years the interim IRR will give a reasonable indication of

the definitive IRR. This period is generally shorter for buyout funds than for early stage and expansion funds.


The classical

fund performance J-curve is also caused by the fact that valuation policies followed by the industry and the

uncertainty inherent in private equity investments allow revaluing upwards promising investments quite late in a funds lifetime. As

a result private equity funds tend to demonstrate an apparent decline in value during the early years of existence

the so-called

valley of tears

before beginning to show the expected positive returns in later

years of the funds life.

Classical fund performance J-curve

-100

-75

-50

-25

0

25

50

75

100

125

150

175

200

225

250

275

300

Q0 Q4 Q8 Q12 Q16 Q20 Q24 Q28 Q32 Q36 Q40 Q44 Q48 Q52

Quarter

IRR%

Real fund performance J-curves


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Performance of Portfolios of FundsPortfolio performance = aggregation of the ones used for the funds (IRR, TVPI, DPI

or RVPI) according to one of the following method:

Average IRR: The arithmetic mean of the internal rates of return (IRRs).


Median IRR: The Value appearing halfway in a table ranking funds by IRR in descendingorder.


Capital weighted IRR: The average IRR weighted by fund size. Source: EVCA Glossary.

Pooled IRR: The IRR obtained by taking cash flows from inception together with the ResidualValue for each fund and aggregating them into a pool as if they were a single fund.

Source: EVCA

Glossary.

Time-Zero IRR: a pooled IRR calculated assuming that all the investments start at the samedate. The Time Zero IRR is used to prevent the order of investments from affecting a portfolio

IRR.


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Portfolios of Funds Pooled vs. Time-Zero IRRFund 7: Net IRR=164.9% TVPI=2.6x

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net Cash Flow

Pooled Net IRR Funds 7;4=162.3%

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fund 7 Fund 4

Time 0 Net IRR Funds 7;4=56.3%

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13

Fund 7 Fund 4

Fund 4: Net IRR=-15.9% TVPI=0.4x

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

2003 2004 2005 2006 2007 2008 2009 2010

Net Cash Flow

*Rebased to Eur10m commitment as Fund 7


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Private Equity Key Risk Measures - Risk vs.

Uncertainty

Economists typically differentiate between risk

and uncertainty.

Risk exists when a probability based on past experience can be attached to an

event, whereas uncertainty exists when there is no objective way to determine itsprobability.

In large public markets, access to information tends to be better and more

uniform, and therefore uncertainty tends to be lower and practically the same for

all participants.

In Private Equity markets, beyond risk

investors are exposed to different degrees of uncertainty,

which for some of them (see next slide) is quite significant and therefore cannot be ignored.

http://newsletter.mp8.ch/url-48706144-316898.htmlhttp://www.sacredheart.edu/index.cfm


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Private Equity Key Risk Measures - Risk vs.

Uncertainty (Contd)

Venture Capital funds target new or recently created companies, often operating in the new

economy. Therefore, as less or no data exist, investors are rather exposed to uncertainty thanrisk.

Buyout funds target established companies, often operating in the old

economy. Therefore, as

data exist and companies are closer to public markets, investors

are rather exposed to risk than

uncertainty.

Portfolio diversification will help to reduce both risk and uncertainty, but while the improvement

can be measured for risk, the final uncertainty level will remain by definition unknown.

Seed Earlystage

Expansion Buyout

True Uncertainty

(not measurable)

Risk

( measurableuncertainty )

Publicmarkets

Maturecompany

Seed Earlystage

Expansion Buyout

True Uncertainty

(not measurable)

Risk

(measurableuncertainty )

R&D

Innovation

Founding ofcompany

Publicmarkets

Maturecompany



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Private Equity Key Risk Measures How to

Measure Risk?

For standard asset classes the historical (or implied) volatility of time-weighted return is often used to assess

(future) risk.

But, Private Equity return measures (cash-flow-weighted) differ from the ones used for standard asset

classes.

Alternatives are:

Volatility of NAV, but this measure has limited relevance due to

valuation issues.

Volatility of quoted proxies (e.g. publicly quoted private equity vehicles or indices), but may not be always

representative of the private equity portfolio held by the investor and may pose idiosyncratic risks that are inaddition to the risks incurred by the portfolio held.

Terminal wealth (i.e. final TVPI or IRR) standard deviation is commonly used.

Capital risk: P(IRR)

0% or P(TVPI)

1.0.

Return risk: P(IRR) or P(TVPI)

Target return.

Value at Risk (VaR).

Measure portfolio concentrations by key risk dimensions/sources,

e.g. by quality of fund managers, operational

status, stage focus, vintage year, geography, industry sectors, or currencies.

It is important to not only measure risk but also to track its changes.



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0%

5%

10%

15%

20%

25%

30%

0 1 2 3 4 5 and more

M U L T I P L E (received divided by invested or return)

PROBABILITY(ofamultipleoccuring)

Direct Fund Fund-of-Funds

Fund-of-funds is highly centered

around the mean and has no

probability of total loss.

30% of direct investments

are total losses!

Extreme profits for direct.

Healthy profits for fund.

Fund is less

skewed and

wide spread.

Copyright: Weidig and Mathonet 2003

Sources: VentureXperts, Cochrane

The Risk Profile of Private Equity US VC

Investments

This chart represents the return (multiple) distribution for direct (blue), fund (red) and fund-of-funds

(green) Venture Capital investments. The fund (i.e. portfolios of one fund) and the fund-of-funds (i.e.

portfolios of 20 funds and investment period of four years) were obtained using a the Monte Carlosimulation. The main conclusions are mentioned on the chart.Measuring returns in Private Equity

16


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The Risk Profile of Private Equity Main US & EU

Markets

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Standard Deviation

Averagemultiple

U.S. funds European funds

Linear (U.S. funds) Linear (European funds)

Mezzanine

Balanced Later Stage

Buyouts

Seed/Early Stage

Later StageEarly Stage

Balanced

Buyouts

US Funds

EU Funds

This chart represents the average return (multiple) vs. its standard deviation for Private Equity fundsby geography and stage focus. These results were also obtained with a Monte Carlo simulation but

using a more recent data set. The results show a classic

risk-return relationship in the US market, but

more puzzling results for the EU market highlighting the historically challenging Venture Capital

segment in Europe. Note that, as for previous results, these are based on historical data and investorsshould based their decision on future expectations.

Source: Mathonet & Meyer (2007)



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How To Measure Private Equity Allocations?

Beforedescribingtraditionalallocationtechnique,itisimportanttofirstdiscuss

howtomeasureaninvestorsexposureinregardtoPrivateEquityfunds.

Therearefourmainoptions: Commitment NAVplustheundrawncommitment

NPIplustheundrawncommitment

NAV

TheNAViffairlyvaluedistherightmeasureofwhatisexposed

tomarketrisks,

butarefundsfairlyvalued?

Theundrawnnotyetbeingpaidinisnotexposedtomarketrisks,buttospecific

fundrisks

(e.g.

quality

of

the

manager

or

market

inefficiencies,

such

as

over

or

underpricing).

NAV plus the undrawn commitment is often used as a measure of exposure by Private Equity practitioners

and by regulations such as Basel II. Traditional allocation techniques (see slide #20) are based on market

values and as these are not observable for PE the NAV is used as

a proxy.


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How To Reach a Private Equity Allocation?

Distributions

Amount

Typical fund-of-funds

Constant allocation to

Private Equity funds

Re-investment

Target allocation

YearsBased on Matter (2005)

Private Equity funds are self-liquidating, i.e. exposure is naturally reduced over time. This combined

with the denominator effect, makes it challenging to reach and maintain a target allocation and

therefore also portfolio construction.


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Traditional Investment Allocation TechniquesStrengths Limitations

Mean-Variance (or

Markowitzs Modern

Portfolio Theory

MPT)

Identifies portfolios with the highest expected return at

each level of risk and Sharpe ratio.

Easy to implement, widely understood and accepted.

Can yield under-diversified portfolios.

Due to issues with access to information and valuations,

forecasting future risk and return metrics for Private Equity isparticularly challenging.

Resampled Efficient

Frontier

More stable than traditional Mean-Variance.

Portfolios tend to be better diversified than traditional

Mean-Variance.

No theoretical support.

Same as MPT although less severe.

Black-Litterman

Produces stable efficient frontiers and well diversifiedportfolios.

Relies on historical standard deviation and covariance.

Requires knowledge of each assets weight in a global index.

No such index exists which would include a Private Equity

allocation.

Monte Carlo Simulation

Overcomes the static nature of the typical MPT

analysis.

Can be used to calculate the probability of meeting

liabilities.

Can be complex to implement.

The output is only as accurate as the inputs, which is achallenge when dealing with Private Equity due to limited

access to information and valuation issues.

Experienced Based

Incorporates decades of asset allocation experience.

Easy to implement.

Not based on sound investment theory.

Few investors have been active in Private Equity for decades,

but probably still the best suited for Private Equity.


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Modern Portfolio Theory (MPT) Private Equity

Limitations

ModernPortfolioTheory(MPT)suggeststhatforefficientmarkets

allocationchoicesaresimple.

Investorschoosetheappropriatecombinationoftheriskfreeassetandthemarketportfoliothatisinlinewiththeirlevelofrisktolerance.

Problems:

Underlying

assumptions

do

not

hold

for

Private

Equity

(see

next

slide). LackandnatureofdatainPrivateEquitymakesitdifficulttomeasure(orrather

assessexpected)risk,returnandcorrelationasdoneforotherassetclasses.

PrivateEquityilliquiditymakesitdifficulttoadjusttheallocation.

Limitedscalability

largeinvestorsmaynotfindsufficientPrivateEquityfundstodeploylargeallocationsandsmallinvestorsmayhavedifficulty creating

sufficientlydiversifiedportfoliosduetohighminimumticketsizes.

Difficulttogetaccesstohighperformingfunds

expectedreturnmaydifferfrom

oneinvestortotheotherandaveragemarketstatisticsmaynotbe

representativeoftheinvestorsaccessiblemarket.


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MPT Assumptions

TheframeworkofMPTmakesmanyassumptionsaboutinvestorsandmarkets(seehttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptions).

Many

of

them

do

not

hold

for

Private

Equity

assets:

Assetreturnsarenormallydistributed(seeslide#16).

Allinvestorshaveaccesstothesameinformationatthesametime(i.e.efficientmarkets)

WhiledisclosuretoinvestorsinPrivateEquitycanbehigh,disclosure

to

the

non

investors

is

very

limited

or

inexistent.

Furthermore,

not

all

investors

haveaccesstoallPrivateEquityfunds(e.g.oversubscribedfundsorsimplynotknowingtheexistenceofsomefunds).

Allsecuritiescanbedividedintoparcelsofanysize forPrivateEquityfractionalsharesusuallycannotbeboughtorsold.

All

investors

aim

to

maximize

economic

utility

in

Private

Equity

some

investors

mayhavenonfinancialobjectives(e.g.publicinstitutionssupportinginnovationviaVentureCapitalinvestments)orindirectfinancialobjectives(e.g.abankinvestinginaBuyoutfundinordertoprovidetheleveragetotheportfoliocompanies).
http://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptionshttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptionshttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptionshttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptionshttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptionshttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptionshttp://en.wikipedia.org/wiki/Modern_portfolio_theory#Assumptions


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Allocations Within the Asset Class

Usuallyportfoliosareconstructedtopdown,bottomuporcombining

thetwo.

Atopdownapproachisstrategyresearchbased,i.e.wheretheinvestorfocusesonstrategiesandthedeterminationofallocationranges.

Thebottomupapproachisfundmanagerresearchbased,i.e.wherethe

emphasisisonscreeningallinvestmentopportunitiesandpickingthe

bestmanagers.

Whileappearingtobeeachothersopposite,thebottomuporatop

downapproachesarecomplementaryandarethereforetypicallyusedintandem.


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The Combined Approach

Followingabottomupapproach,investorswillidentifytheirwishlistoffund

managersandthereforearesultingallocation.

Followingatopdownapproach,investorswilldeterminetheirwishedallocation.

Then

the

wish

allocation

has

to

be

compared

to

the

resulting

one

and

trade

offs

havetobemadeinordertodeterminetheportfoliostructure.

Finally,duringthemonitoringphase,monitoringfindingsshould

beusedtofeed

boththetopdownandbottomupapproaches.


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The Top Down Approach (Contd) Attractivefeatures Enhancetheportfolioreturnbyallocatingresourcestothenextbig

thing

(e.g.

clean

tech).

Sanitychecktoavoidhypes,(e.g.toomuchcapitalinvestedinatoonarrowsectorortoohighvaluations).

Improve

the

efficiency

of

front

office

resources

by

focusing

on

most

interestingmarketsegments.

Potentialproblems Complex,difficulttoimplement(seeslide#21

onMPT).

Strictallocationsarenotpossibleinrealityas:

Somequalitymanagersmaynotexistforsomewishedallocations.

Some

quality

managers

may

exists

for

unwished

allocations.


26/29


The Bottom Up Approach (Contd) Attractivefeatures Thebottomupapproachissimple,easytounderstandandrobustbeing

basedon

ranking.

Enhancesportfolioreturnbyconcentratingonthehighestalpha

fund

managers.

Control

for

risk

by

sufficient

number

of

fund

managers

and

maximum

perfund/manager(e.g.minimumof20funds/managersandmaximum

10%perfund/manager).

Potentialproblems

Canlead

to

unbalanced

portfolios

(e.g.

too

much

mega

buyouts).

Canmissmacroeconomicchangesoropportunities(e.g.cleantech).


27/29


The Impact of Diversification on Risk (Contd)

Diversification Benefits and LimitationsPortfolio of US venture capital funds

0

10

20

30

40

50

60

70

80

90

100

1 2 5 10 15 20 25 30 40 50

Number of funds in portfolio

In

dex

(1

fund=1

00)

Standard deviation Skewness KurtosisSource: J Curve exposure, Mathonet & Meyer (2007).

The figure above shows the evolution (basis 100 for a portfolio of one fund) of the standard deviation,

skewness and kurtosis of US VC funds portfolios composed of 1 to

50 funds. As illustrated by the

figure above, based on the standard deviation, with about 20 positions, most of the diversificationbenefits for a specific

risk dimension are obtained.


28/29


Source: Thomson Reuters VentureXpert database. Performance to Q4-2010.

European PE funds pooled IRR by vintage year

22%

14%

31%

44%

17%10%

7% 7% 6%

19% 20% 16%12%

-6%-2% -5%-1%

12.8%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PoeR%)

Recession Non-recession

Funds within J-Curve Period

Market timing versus cost-averaging

This chart above represents the pooled by vintage year (VY) for European PE funds (e.g. VY 1991 has a pooled

IRR of 12.8%). Recession (non-recession) VY have been defined as year during which the EU GDP growth was

below (above) the average GDP growth during the observation period. This chart suggest a market timing

opportunity, i.e. PE investments made during downturns have generated superior performance.


29/29

Measuring returns in Private Equity

European PE Fundraising and Investment Actitivity (Eur bn - left scale)Vs. Vintage Year Pooler IRR Performance (right scale)

0

20

40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q3

2010*

-10%

-5%

0%

5%

10%

15%

20%

25%

Fundraising Investments Vintage Year Pooled IRR Performance Fundraising (Trendline)Latest update as of March 2011

Market timing versus cost-averaging (contd)

This chart above represents the same performance data as the previous chart (yellow line) complemented by the

yearly fundraising and investment activities in European PE funds. This illustrates that it is difficult to time the

market and that most investors and GPs got it wrong, increasing (decreasing) their investment during relatively

weaker (stronger) vintage years. This, complemented with the facts that 1a fund commitment is an exposure for

the next 10-12 years and 2that the quality of projections significantly decrease with the increase of the projectionhorizon, explains why investors generally favour time cost-averaging over market timing.

measuring returns in private equity-30511

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