This chapter explains how to measure private equity performance. One of the key distinctions to be focused on is the gross versus net performance of a fund or investor. Gross returns are the returns earned by the private equity fund before fees are paid to the manager. Meanwhile, net returns are the returns earned by the investors in the fund after the fees of the manager have been deducted. Various measures are applied to monitor and adjust for the timing differences between total return and receipt of cash flows. DPI measures distribution as a percentage of paid-in capital, while TVPI measures total value as a percentage of paid-in capital. However, the most commonly used measure is the Internal Rate of Return (IRR). IRR is a cash flow measure that allows for the timing of cash flows. The chapter then highlights the importance of understanding both the overall industry returns and their variance and volatility over time. The variation in returns between the most successful and least successful fund managers is a key statistic to understand the performance and risks of the industry.
