How can you measure the success of your PE portfolio?

1 Internal Rate of Return

One of the most common and widely used metrics for measuring PE portfolio success is the internal rate of return (IRR). IRR is the annualized compound return that an investor earns on their invested capital over the life of the PE fund or deal. IRR takes into account the timing and size of cash flows, such as capital calls, distributions, and exits. IRR can be calculated at different levels, such as the fund level, the deal level, or the portfolio company level. IRR can also be compared to the hurdle rate, which is the minimum return that the PE fund must achieve before the fund manager can receive carried interest or performance fees.

2 Multiple of Invested Capital

Another common metric for measuring PE portfolio success is the multiple of invested capital (MOIC). MOIC is the ratio of the total value of the portfolio to the total amount of capital invested. MOIC reflects the absolute return that an investor earns on their invested capital, regardless of the time horizon or the cost of capital. MOIC can be calculated at different levels, such as the fund level, the deal level, or the portfolio company level. MOIC can also be compared to the target multiple, which is the expected return that the PE fund aims to achieve for its investors.

3 Public Market Equivalent

A third metric for measuring PE portfolio success is the public market equivalent (PME). PME is a method of comparing the performance of a PE portfolio to a relevant public market index, such as the S&P 500 or the MSCI World. PME adjusts the cash flows of the PE portfolio by applying the same returns that the public market index would have generated over the same period. PME can be expressed as a ratio, where a PME greater than one indicates that the PE portfolio outperformed the public market index, and a PME less than one indicates that the PE portfolio underperformed the public market index.

4 Value Creation Drivers

A fourth method of measuring PE portfolio success is to analyze the value creation drivers that contribute to the portfolio performance. Value creation drivers are the factors that influence the growth and profitability of the portfolio companies, such as revenue growth, margin expansion, capital efficiency, acquisitions, divestitures, and operational improvements. By identifying and quantifying the value creation drivers, PE investors can understand how they add value to their portfolio companies and how they can enhance their competitive advantage and exit potential.

5 Portfolio Diversification

A fifth method of measuring PE portfolio success is to assess the portfolio diversification across different dimensions, such as geography, industry, sector, stage, strategy, and risk profile. Portfolio diversification can help PE investors reduce their exposure to specific market shocks, capture opportunities in different segments, and optimize their risk-adjusted returns. By monitoring and adjusting their portfolio diversification, PE investors can balance their portfolio composition and alignment with their investment objectives and market conditions.

Measuring the success of your PE portfolio is not a simple or straightforward task. It requires a combination of different metrics and methods that capture the nuances and complexities of PE investing. By using the metrics and methods discussed in this article, you can gain a deeper and more holistic insight into your portfolio performance and value creation.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?