What are the most effective methods for analyzing private equity investment returns after an exit?

The Cash-on-Cash multiple is useful, but the drawback is that it only calculates the total multiple of invested capital and total returns, without taking into consideration the time value of money. Returns may be generated over a span of 5 years, yet the Cash-on-Cash multiple remains the same.

Diving into cash-on-cash multiples provides a straightforward snapshot of investment performance, but coupling this with the internal rate of return (IRR) can paint a more comprehensive picture. The IRR accounts for the timing of cash flows, which is critical in private equity where the investment horizon can significantly impact returns. While cash-on-cash might show the magnitude of return, IRR reveals the efficiency of the investment over time. Balancing these two metrics offers a nuanced view, allowing for deeper analysis and smarter future investment decisions.

IRR is a good metric to compare as it takes the time value of money into consideration. It calculates returns on a timely basis at regular intervals, such as annually. The Internal Rate of Return is considered more accurate than the Cash-on-Cash Multiple, as it calculates returns according to time, which is most important for an investor to know.

In my experience, MOIC is metric which can provide you with total multiple of your returns but at the same time it will not consider time in calculation of returns.

After an exit, investors and fund managers analyze the performance of their investments to make informed decisions. One effective method for this analysis is multiple on-invested capital (MOIC). This metric compares the total value received from an investment to the initial amount invested. If the MOIC exceeds 1, the investment has generated positive returns. On the other hand, if the MOIC is less than 1, it signifies a loss. By calculating the MOIC for individual investments and across a portfolio, investors can gain valuable insights into their private equity holdings' overall performance and profitability. MOIC provides a simple way to assess investment performance and helps investors make better decisions.

In my experience, NPV plays an important role while comparing different investment opportunities which can measure the potential returns and value creation over a period of time

Considering MIRR it is useful to: 1) Use MIRR to evaluate compound annual growth, incl. reinvestment risks and cash flow timing 2) Compare MIRR with traditional IRR to understand reinvestment assumption impacts 3) Analyze MIRR sensitivity to different reinvestment rates for robustness under varied market conditions 4) Break down MIRR by investment stages to identify key value drivers 5) Benchmark MIRR against industry standards for relative performance assessment 6) Consider investment duration with MIRR; longer periods require higher MIRRs for risk compensation 7) Apply scenario analysis for different exit timings and reinvestment rates, testing market resilience 8) Combine MIRR with other financial metrics for a comprehensive overview

No single metric (that’s commonly used) captures the whole story. The best LPs and investors use a combination of metrics to evaluate an investment’s performance from multiple perspectives. Cash on cash return is helpful for assessing the overall financial return of an investment, but IRR will continue to be helpful in representing time: a 2x cash on cash multiple looks very different over 10 years, compared to 2 years.

Here are a couple of metrics to consider: 1. TVPI (Total Value to Paid-In): Incorporate both realized and unrealized values to gauge the total performance of the investment relative to the capital contributed. 2. Benchmarking: Compare the investment's performance against industry benchmarks and peer group metrics to assess its relative success. 3. Risk-Adjusted Returns: Consider the risk profile of the investment by incorporating metrics such as the Sharpe ratio or similar measures, which account for the level of risk taken to achieve returns.

(a) Factor in the impact of management fees and carried interest on net returns. These costs can substantially reduce investor returns. I always ensure these are accounted for to understand the true net return to investors (b) Consider the impact of the investment on the firm's reputation, especially for high-profile investments. The reputational impact, both positive and negative, can have long-term effects on a firm's ability to raise funds and attract quality deals, as I have observed on several occasions (c) Analyze the investment's performance in the context of the overall portfolio. Understanding how one investment contributes to portfolio diversification and overall performance has been a key part of my strategy.

One thing I've found helpful is using different metrics for different investments as considering metrics like TVPI, DPI, MOIC, IRR, TWRR, MWRR and so on. They are used together to get to a conclusion, no single metric can perform a whole analysis of the investment. Consider using them with each other to get a better perspective.

After an exit, analyzing private equity investment returns is crucial for investors to assess the success of their investments and make informed decisions for future investments. Private equity investments are illiquid and long-term, making employing effective methods for analyzing their returns essential. In conclusion, analyzing private equity investment returns after an exit requires employing multiple effective methods to gain comprehensive insights into their performance. Metrics such as Net Multiple of Invested Capital (MOIC), Internal Rate of Return (IRR), Cash-on-Cash Return, Public Market Equivalent (PME) analysis, and peer benchmarking are essential tools for evaluating private equity investment returns.