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34 BVCA Private Equity and Venture Capital Performance Measurement Survey 2011
Appendix I – Methodology
Continued
Calculation of return
The returns are derived from cash flows and
valuations of funds at the relevant period
year-ends and the calculation of the change
between them on a per annum (p.a.) basis.
The measurement of performance in this survey
is the internal rate of return (IRR), a widely used
measure of performance and comparable with
similar studies of private equity fund returns in
the US and Europe, which are both time- and
money- weighted. The return represents the
‘net’ return to investors after costs and fees.
Provision is made for performance fees that
would have been payable if the valuation had
been realised at the balance-sheet date. Returns
for WM Pension Fund Universes and indices,
supplied by WM, are gross time-weighted
returns (TWR).
The IRR is used as the appropriate performance
measure for venture capital and private equity,
due to the high level of discretion of the manager
in determining cash flows, to and from the
investor, and the difficulty in determining
portfolio valuations at the date of these cash
flows. Time-weighted return calculations
require frequent and easily obtainable revaluations
and assume a low level of manager
discretion in the timing of cash flows. The
academic community and the CFA (Chartered
Financial Analyst) Institute supports the use
of the IRR as the most appropriate measure
of private equity and venture capital fund
performance.
Listed Private Equity
Morningstar (www.morningstar.com) has
calculated the performance of listed private
equity (formerly known in the survey as quoted
private equity investment trusts or PEITs).
More information on listed private equity
can be found at: www.lpeq.com/
Valuations
The survey is based on cash flows and
valuations supplied by each participating fund.
PwC has stipulated that these be based on the
International Private Equity and Venture Capital
Valuation (IPEV) Guidelines, developed by the
BVCA, European Private Equity and Venture
Capital Association (EVCA) and Association
Française des Investisseurs en Capital (AFIC),
the French national association, and which
were first introduced in March 2005.
However, as noted in the ‘Disclaimer’, PwC has
not independently checked the valuation data,
nor confirmed that the International Private
Equity and Venture Capital Valuation Guidelines
have been strictly adhered to. Sixty-two per
cent of the funds surveyed contain unrealised
investments, which are usually stated at fair
value in accordance with these Guidelines,
and which give a return in an interim measure
of performance.
Confidentiality
The data for this survey was provided by BVCA
members on the basis that no data relating to
any individual member or fund would be seen
by any other member, including those on the
BVCA Investor Relations Committee, or by
another person or organisation other than PwC
or Capital Dynamics (unless members specified
otherwise) other than in the anonymous and
aggregate form in which it is published.