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The 2016 Preqin Global Private Equity & Venture Capital Report

How Much Richer Are Beneficiaries Thanks

to Their Private Equity Program?
- Prof. Oliver Gottschalg, Head of Research, PERACS
In late 2015, CalPERS released data
around carried interest payments made to
its private equity (PE) GPs, disclosing fees
of $3.4bn as well as detailed information
on the carry payments by the fund since
its inception in 1990 to 30 June 2015.
The release indicates that the CalPERS
PE program has generated profits
totalling $34.1bn over that same period.
Intriguing as this information may be, the
question to be asked is: How much of
the $34.1bn is true Alpha generated out
of the PE Program? In other words, what
returns, in excess of the returns that the
CalPERS plan would have generated had
it invested in the other asset classes, did
the private equity program generate?
We can answer this question through the
following analysis. The exercise utilizes
commercially available net cash flow
(CF) data from Preqin on 635 ($52.7bn
in commitments) of the 848 PE funds
(totalling commitments of $67.8bn) listed
on the CalPERS website. Of the 635 we
analyzed, 106 received carry, and the
total carry they received was $2.3bn.
While no outsider can guarantee the
accuracy of this data and the data only
covers roughly three-quarters of the
CalPERS track record, it enables us
to derive directionally indicative results
about the amount of Alpha generated, as
well as about the relationship between
Carry, Profit and Alpha.
To help make comparisons, PERACS
constructed a CalPERS Index, based on
the semi-annual returns of the entire plan
derived from CalPERS publications since
1990. The performance of the CalPERS
Index has been modelled to follow the
evolution pattern of the S&P 500 Index
since 1990. The PERACS Alpha
methodology was then applied. PERACS
Alpha quantifies CalPERS PE investment
returns relative to the forgone opportunity
of being able to invest the money
elsewhere in the plan. Specifically, each
of the PE cash flows were discounted
back to 1990 with the appreciation of the
CalPERS Index between the date of the
CF and 1990. As a simplified example,
consider a fund with two cash flows
only: if a fund calls capital in 2004 and
returns it in 2008, then the capital call
will be divided by the appreciation of
the CalPERS Index between 1990 and
2004, while the distribution will divided by
the appreciation of the CalPERS Index
1990 and 2008. The difference between

the Present Value of the distribution and

the Present Value of the takedown is the
Alpha of this fund in terms of 1990
value. We then multiply this value with
the appreciation of the CalPERS Index
between 1990 and 2015 to get to the
Alpha in 2015 value terms.
Doing so for the 635 funds (scaled by
the commitment amounts listed on the
CalPERS website) gives a total CalPERS
Alpha of $13.0bn. This clearly indicates
that CalPERS PE program has served
CalPERS beneficiaries very well, as on
the aggregate, the value created by the
PE program in excess of the CalPERSspecific opportunity costs of the capital
devoted to the program, net of all fees
paid to GPs, is $13bn. In other words,
CalPERS beneficiaries would have
$13bn less in wealth had the PE Program
not been created and run the way it has
been since 1999. This is more than 5x the
carried interest payment and about 50%
of the absolute dollar value created by
these 635 funds, i.e. the un-discounted
surplus of these funds.
As prevailing fee structures reward
absolute returns and not alpha
generation, CalPERS carry payments
are not fully aligned with performance.
Taking a closer look at carried interest,
CalPERS Alpha and absolute dollar
value created by each of the 635 funds,
we observe that fees paid relate much
more strongly to the absolute dollar value
created than to Alpha, while it is Alpha
that really matters. Specifically, 40% of
the carry was paid to the bottom 20% of
funds by performance, which translates
into a worrying amount of carry being
paid to funds that fail to deliver promised
levels of outperformance or even destroy
Alpha (see Fig. 1).
Similarly, several top performing funds
Fig. 1: Carry Received by Level of
No. of

Carry Received

<10% Alpha



<5% Alpha



<3% Alpha



Negative Alpha


Level of Alpha

Source: Preqin and PERACS

by Alpha are undercompensated. We

identify 43 funds that generate more

Alpha than profit (in $ terms). These are

real heroes for CalPERS beneficiaries,
as they collectively generated $800mn
more in Alpha than in profits, but
received less carry than they deserved.
Specifically, there were 38 funds for which
zero carry was listed in the CalPERS
press release, which each had a positive
annual Alpha and collectively generated
$1.4bn in CalPERS Alpha. Even more
troublesome, for 12 funds, zero carry
was listed in the CalPERS press release,
while they had an annual Alpha of over
10% and collectively generated $365mn
for CalPERS.
In summary, this case study shows that
private equity has been a major contributor
to the wealth of CalPERS pension plan
beneficiaries, while at the same time
identifying structural shortcomings of the
current incentive schemes for PE fund
managers. It clearly provides billions of
dollars worth of raisons dtre for PE
in pension fund portfolios, but also a
couple of hundred million dollars worth of
reasons to re-think whether carry should
be paid (at least partially) on Alpha, rather
than on absolute returns.

PERACS is a leading provider
performance certification services
for the private equity industry,
statistical methods for identifying key
attributes of a funds performance,
its risk profile, and its strategic
differentiators. This comprehensive
set of standardized, quantitative
metrics is generated at the deal, fund
and portfolio level, cumulatively and
continuously, for periodic reporting.
General partners use PERACS
positioning, not only for internal
use but to enhance fundraising
effectiveness and efficiency and for
ongoing investor communication.
Limited partners use PERACS to
provide unique perspective into
portfolio risk and return profile
with application in portfolio design,
investment decision support and
optimizing performance.

For more information about the report, please visit: www.preqin.com/gper

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