Private investigations: uncovering when you’re winning in unlisted assets 

"It's a mystery to me, the game commences."
Mark Knopfler (songwriter, Dire Straits)

Investing in unlisted assets like private equity has its attractions; in particular, sometimes the returns look like they belong on a highlight reel. But when it comes time to answer the deceptively simple question, “So, how are we doing?”, the sector has a habit of turning normal performance evaluation into a mysterious adventure.

That’s not because investors are doing it wrong. It’s because private markets are built differently: capital goes in over time, distributions come back on an irregular schedule, valuations aren’t continuously marked to market like public stocks, and the investment manager often has real influence over the timing of cash flows. All of that makes “standard” performance comparisons challenging.

This article, as a follow-up to “Private conversations: managing expectations for unlisted assets”, offers practical guidance on evaluating the performance of a private equity fund.

Before you pick a benchmark or debate the merits of various metrics, answer a basic question: Are you evaluating the portfolio, or the manager?  Those aren’t the same thing:

• Portfolio evaluation is about whether your private markets programme is doing what you set it up to do - meeting long-term objectives, complementing the rest of the portfolio, and earning its keep relative to other asset classes.
• Manager evaluation is about whether a specific General Partner (or manager) is adding value through skill: selection, structuring, operational improvements, timing and exits.

That one decision drives everything else: which benchmarks make sense, which return calculations are appropriate, and what a “fair” comparison even looks like.

Most private market benchmarking approaches fall into two broad camps:

1. Peer comparisons - “How are we doing versus others like us?”

Peer comparisons look at similar private funds, often grouped by strategy type and vintage year.  This can be genuinely useful because vintage year matters in private markets. Funds raised in the same period often face similar macro conditions, valuation environments, and exit opportunities. Peer sets can also be tailored (to a point) by geography and strategy.

But there are catches. Some strategies are niche so sample sizes can be thin. Peer benchmarks can also be subject to survivorship bias and lack transparency (fund mandates and risk profiles can vary a lot even if the label sounds similar), and availability and depth aren’t always consistent across vintage years. It follows that peer groups can be a helpful mirror but they’re not a perfect measuring tape, particularly in a New Zealand context, given the relatively narrow peer universe.

2. Public market comparisons - “What if we’d just bought the index?”

Another common method is comparing private equity performance to a public market index - because, bluntly, that’s the alternative for many investors. If private equity is (in part) funded by selling (or not buying) public equities, it’s reasonable to ask how it stacks up against a broad global or New Zealand equity index, or in some cases a more specific index (e.g. the Nasdaq for a tech-heavy strategy).

Investors often apply a spread or margin over the index return to reflect private equity’s higher fees, illiquidity, governance burden, and overall “hassle factor”. This is especially the case where, due to equity index unavailability or other reasons, an official cash rate or consumer price index is adopted as the base reference.

The downside of using public benchmarks is that they don’t automatically reflect illiquidity premiums, unique portfolio characteristics, staggered investment timeframes or the reality that private markets don’t behave like daily-priced securities. Which brings us to the performance maths issue.

Public markets typically speak Time-Weighted Return (TWR). Private markets usually speak Money-Weighted Return (MWR) - most notably, Internal Rate of Return (IRR). If you compare them without the right context, you’ll get numbers but not meaning.

• TWR: the “pure investment performance” lens. This measures the compounded growth rate over a period and removes the impact of cash flows. It’s the classic method for liquid assets where the manager doesn’t control when you add or withdraw money.
• MWR / IRR: the “cash-flow reality” lens.  This accounts for when cash went in and out. In private markets, timing is everything: capital calls, distributions, and exit pacing can dramatically change IRR outcomes.

A fund that returns money early can post a great IRR even if the total profit isn’t impressive. Meanwhile, a fund that compounds value patiently might look less exciting on an IRR basis - until you look at the “multiple”, which leads to the following “big three” private markets metrics.

There are three widely used measures for private equity fund performance:

• IRR: As noted, this is a rate of return that reflects the timing of cash flows and interim valuations. Investors like it because it looks familiar - like other asset class returns - and it captures some element of manager decision-making and pacing.
• TVPI (Total Value to Paid-In): Think of this as the “multiple.” It’s the total value generated (distributions plus remaining net asset value) divided by how much capital you have put in (total contributions or capital calls).
• DPI (Distributions to Paid-In): How much cash has come back, relative to what you have contributed. This is the “show me the money” metric.

Rather than picking a favourite, all three can add insight. IRR tells a timing story. TVPI tells a total value story. DPI tells a liquidity/realisation story. Together, they provide a more honest picture of performance and a more useful framework for comparing against other funds of similar style and vintage.

One of the most useful “bridge” tools between private and public comparisons is the Public Market Equivalent (PME). This methodology takes the private investment’s cash flows and lines them up against a public index - effectively asking: “If I had invested and withdrawn those same cash flows in the index, what would I have ended up with?”. This helps investors make a more apples-to-apples comparison between private market cash flow patterns (MWR world) and public market performance (TWR world).

"And what have you got, at the end of the day?  What have you got to take away?"
Mark Knopfler (songwriter, Dire Straits)

To sum up, private markets benchmarking is complicated because private markets are built differently. Every metric, including IRR, has trade-offs and approaches are evolving. The goal isn’t perfection - its usefulness and consistency.

When undertaking your own “private investigation”, a sensible approach is to:

• Be clear on the question you’re answering (portfolio vs manager assessment).
• Choose benchmarks that match that purpose.
• Make sure return calculations are comparable (TWR vs MWR; PME where relevant).
• Focus on after-fee outcomes.  
• Ask your investment manager which metrics they emphasise – and why.

Ultimately, the goal is to know - confidently - whether your private markets programme is justifying the risks of including it in your portfolio.