Research Questions PE, Venture Cap Performance, Poised to Shake Up Industry

(December 5, 2011) — A new paper by Rüdiger Stucke at the University of Oxford claims that the Thomson VentureXpert (TVE) database, which has been used for over two decades by practitioners and academics to benchmark and judge the performance of private equity and venture capital, may be seriously flawed.

“It is going to shake up the industry,” James Bachman of The Burgiss Group, whose client list includes over 300 asset owners that represent in excess of $1 trillion in private capital commitments, told aiCIO, referring to the study.

According to the report, a closer look at aggregated and individual figures revealed severe anomalies in the underlying data which are the result of ceasing data updates. “Since existing errors have a systematic and persistent character, they do not just increase noise but result in a significant downward bias of presented performances. Consequently, many empirical results established using this database may not be replicable with correct data. In particular, the claim that private equity has not outperformed public equity is unlikely to hold with true numbers,” the paper asserted.

The paper continued: “This paper is relevant to both academia and industry practice. It contributes to the existing academic literature by explaining and amending the surprisingly negative findings on private equity performance. It presents private equity returns from that period in a much different light relative to public equity which – it could be argued – is consistent with the observed wealth effects to most early investors and the increasing popularity of the asset class. It further helps to explain a number of curious findings and interpretations among other articles based on TVE’s individual fund performance data.”

In regard to industry practice, the author of the report concluded that the paper helps to explain why there have been far too many private equity firms in the past reasonably claiming to be ‘top-quartile’ by comparing the performance of their previous funds with TVE’s performance index. “Furthermore, the relative success of the private equity programs from hundreds of institutional investors who benchmark their portfolio against TVE might appear in a very different light, and large sums of bonus payments have inevitably been inflated over the past decade,” the author wrote. “Finally, all kinds of cash flow forecasts – particularly on the distribution side – that were based on TVE data are likely to be underestimated, which might have considerably affected the rating and pricing of a number of collateralized fund obligations (CFOs) as well as exchange traded fund of funds in the market.”

Click here to download the full report.