Performance data: using returns to predict returns

There is no secret formula to building a successful business in private equity, whether on the intermediary or investment side. Those that wish to survive the constant peaks and troughs of a market that is inexorably linked to the fortunes of a volatile global economy are those that can, with a fair degree of accuracy, predict the businesses, sectors and geographies that are likely to provide the best rates of return at any one time and over a number of years. This, however, is a skill that remains largely unquantifiable.

For this reason access to accurate and reliable data is invaluable, providing businesses with a vital edge that can help them stay ahead of the field and adapt to the constantly shifting dynamics of the contemporary marketplace. In terms of investments and funds this information is widely available, but in terms of performance and returns – the business end of the cycle and thus where there is arguably the most demand– such data is both sparse and of questionable quality.

This discrepancy is understandable, it is not good business for private equity firms to openly disclose to potential partners or LPs evidence of poor judgement, and, in some cases, confidentiality agreements can even prevent the disclosure of good news. Aware of these concerns, CEPRES (Center of Private Equity Research) has developed a mechanism that protects the intimacy of private equity dealings whilst also providing a platform that allows firms to benchmark themselves sophistically. Following this approach, the new Private Equity Insight Performance Analyser provides unique, anonymous and non-retraceable performance data sourced directly from the firms doing the deals. How is this possible, and what benefits does this offer in comparison with other available sources?

Building relationships

CEPRES was originally formed in 2001 in response to demand from the European Union for improved information on Europe’s growing private equity industry, which lagged far behind that available in the US. The EU therefore offered sponsorship for academic research projects into the industry leading to a co-operation between several major European academic institutions, led by the chair of banking and finance at the Johann Wolfgang Goethe-University in Frankfurt am Main, and fund-of-funds manager VCM.

The problem was where to source this information to ensure reliability, as Daniel Schmidt, managing director of CEPRES, explains: “In the beginning we didn’t have anything, so we went to fund-of-funds that we knew in order to develop channels and began to build relationships with the GPs directly”. The company capitalised on the dual issue that private equity firms both wanted data but were unwilling to disclose anything themselves by making an innovative proposal. In return for providing information on all their portfolio companies on an ongoing basis, firms would become a long term partner of CEPRES; gaining member-specific access to the aggregated data, analyses and market transparency, all of which would be presented in such a way as to ensure complete anonymity. “The exchange system works since we take care that the partnership with CEPRES is an unique value add for the investor, allowing them to do better investments by knowing the markets better”, Schmidt emphasises.

Data differences

The CEPRES database contains information on some 21,000 portfolio companies, which represent the investment activities of a substantial proportion of the private equity firms in Europe, the US, and Asia and spread across all sectors from venture capital through to the buyout space. Indeed, according to Thomas Etzel, head of private equity and real estate at BHF-Bank, which has been a strategic partner of CEPRES since its seed funding, it is primarily the large scale of the data set that sets it apart from the competition: “The database is unique, the extent of the data and its scope cannot be found anywhere else”.

But the data is also unique in its format, differing from the traditional model of providing returns on an individual fund level and instead operating at a transaction level. This is a result of how the information is sourced, with private equity firms supplying cash flow details on all portfolio companies rather than just providing limited data on individual events, such as recapitalisations or divestments. The result is that the returns provide a more accurate representation of a company’s overall performance under private equity ownership, as well as allowing for data to be provided both for investments that have been realised and those that are still in the current portfolio.

Search results are displayed in groupings, with a typical search result displaying the returns, in terms of both an IRR and a TVPI (total value paid in) multiple, in deciles, quartiles, or simply best 50% to worst 50% depending on the number of results returned (see chart). As well as ensuring that all transaction details are kept confidential, this more accurately reflects the full range of potential returns within a given investment criteria. “This is the main selling point of data at a transaction level as opposed to the fund level, as this shows both the best-case scenario and worst case scenario for an investment in given market environments, something which is usually diluted when information is presented at the diversified fund level” asserts Schmidt.

The benefits

The advantage of data presented in this manner is that it is more adaptable to the day-to-day operations of private equity, with investors needing to find a balance between the long term vision required to effectively generate returns over the life span of a fund and the more immediate concerns of investing capital in the market at a given point in time. “Funds are invested over several years, during which time the markets can change substantially. Solely a vintage year declaration does not reflect the investor’s real investment timing and does not indicate the reason for different performance implications across the same vintage year funds. Data on a transaction level can therefore help investors to better map their investments by analysing performance on real transactions that occurred in similar historical circumstances,” suggests Schmidt.

More significantly, the data can provide investors or advisers with useful forward-looking insights into what areas of the market, in terms of stage, sector or geography, are likely to perform best over a given period, for example in the years following an economic downturn (something that is obviously prevalent in today’s climate). This is particularly useful during fundraising cycles, as Etzel confirms: “We rely on CEPRES data to provide accurate research and prognosis when raising our fund-of-funds and it invariably provides very accurate predictions of shifting market dynamics”.

Using returns to predict returns

The value of accurate and reliable performance data has never been in question, as data of this nature is arguably the best way for private equity professionals to anticipate the effect of changing market dynamics and adapt their business to a rapidly shifting economic backdrop. The Private Equity Performance Analyser, powered by CEPRES, not only provides this sought after information based on a huge dataset of both current and realised private equity portfolio companies, but its unique focus on real transactions in their specific context is specifically designed to best respond to the needs of private equity professionals across all areas of the industry. “People in their daily business need company based data in order to develop accurate benchmarks and this what we have been providing for the last eight years” Schmidt concludes.

For more information on the Performance Analyser, visit http://www.privateequityinsight.com/analyser_faq.jsp

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Performance
• UK / Ireland
• DACH
• Nordics
• France
• Southern Europe
• Benelux
• CEE