PitchBook Benchmarks Finds No Evidence of Credit Lines Inflating IRR, Despite Recent Scrutiny
March 7, 2019
SEATTLE, March 7, 2019 -- PitchBook, the premier data provider for the private and public equity markets, today released fund performance data through 2Q 2018 from its stand-alone performance measurement product, PitchBook Benchmarks. The comprehensive performance data is designed to help limited partners (LPs) and general partners (GPs) better understand private market fund performance relative to broader asset classes and other PE and VC strategies. In this edition, PitchBook examines the reliability of the IRR metric, following increased scrutiny over the use of credit lines to meet near-term funding obligations. To complete this analysis, PitchBook isolated funds at various stages in the lifecycle (specifically the three-, five-, seven-, 10- and 12-year mark) and did not find any evidence that IRR is being distorted for funds of more recent vintages.
The PitchBook Benchmarks PDF and Excel data packs are available for download here.
"IRR has been the performance metric of choice for decades, yet it consistently draws scrutiny from industry professionals for its litany of flaws, including its susceptibility to abuse. Recently, controversy around subscription credit lines, especially the Abraaj Group's in 2018, has renewed skepticism about the reliability IRR," said James Gelfer, senior strategist at PitchBook. "When questioning whether investors should trust IRR, it's important to highlight that IRR tends to be highly volatile in the early years through the investment period and can appear inflated relative to older funds. As a result, we suggest that industry professionals deemphasize the importance of IRR at least until the fund is fully invested."
PitchBook reviewed IRR to uncover if egregious practices are in fact outliers or rather a systematic inflation of IRR figures. Key takeaways include:
Despite suspicion that subscription credit lines could be inflating IRR, PitchBook did not find any evidence that the IRR of newer vintages is being manipulated by these facilities. The reported IRR of recent vintages can appear to be "inflated" when compared to historical performance, but this apparent inflation dissipates when controlling for the age of the funds.
While most funds tend to hit their peak IRR around year seven, the median fund has historically been able to maintain that level through liquidation. But that still means roughly half of managers eventually revise their IRRs lower in the end stages of a fund's life.
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 23,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.