FUND PERFORMANCE ANALYTICS

Risk Measurement

The MJ Hudson PERACS Risk Curve captures the distribution of MJ Hudson PERACS Alpha performance within a portfolio of deals in a single measure.

It shows the dispersion of returns in a portfolio compared to any relevant benchmarks

The Risk Coefficient makes it possible to compare and benchmark:

  • Manager risk to an overall portfolio, sub-asset class, and geography
  • Create a reward-risk trade-off matrix

This methodology gives a measure of risk for a GP that can be compared over time and to a benchmark(s) as opposed to the traditional method of calculating a simple “loss ratio”.

Empirical Assesment of Strategic Uniqueness

PERACS RM 1

Intuition

Empirical assessment of the level of the client’s strategic uniqueness/differentiation (fund-by-fund and at the GP/total portfolio-level) based on the overlap between each of these funds and the PE universe.

Calculation of the Strategic Uniqueness Score

  • We divide the PE universe into “strategic cells”, based on (1) industry sector, (2) time-varying deal-size quartile, (3) investment timing and (4) geography. We then measure the percentage of activity in each “strategic cell” for (I) the focal fund and (II) all other PE investment activity;
  • We calculate the “strategic overlap” as the sum of joint activity (minimum of the percentage invested of the firm and the percentage invested by all firms in a given cell) over all cells. A strategic overlap of “1” means that a fund invests exactly like the average PE firm; a score of “0” indicates that no other firm makes similar investments;
  • This method is a refinement of one of the criteria that determine the “Fitness Score” of the HEC-DowJones PE Fitness Ranking.

Empirical Assesment of Investment Timing

PERACS RM 2

Intuition

We use the comparison of the pattern of client’s investment activity with the pattern of investment activity of the overall PE universe as a proxy for the client‘s quality of deal flow, i.e. ability to continue to invest during periods when all other PE firms are decreasing their investing pace.

Calculation of the Pro-cyclicality Score

  • We measure the correlation between client’s investment pattern (i.e. number of deals by quarter) and the investment pattern of the overall PE universe;
  • A correlation of “1” means that the client invests in a perfectly pro-cyclical fashion, i.e. with the same pattern over time as the overall PE universe – which does not manifest any proprietary deal flow, whereas a correlation of “-1” means that the client invests in a perfectly counter-cyclical fashion, which can be seen as a proxy for proprietary deal flow;
  • This method is a refinement of one of the criteria that determine the “Fitness Score” of the HEC-DowJones PE Fitness Ranking.