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Research

Alignment Capital Group’s investment professionals are practitioners in the private equity industry committed to applying the techniques of traditional finance to better understand private equity as an asset class. Consequently they have been, and continue to be, contributors to the research literature in this area.

The firm produces quarterly research briefs and periodic white papers, in addition to publishing occasional articles in trade periodicals and journals. A research project often begins as a client question and always has the purpose of better understanding the investment aspects of private equity. Empirical research has the goal of helping ACG’s clients better manage their investment portfolios. ACG’s clients are afforded unfettered access to the firm’s research and help shape the research agenda on an ongoing basis.

Listed below are published research papers and articles by the firm’s current and former professionals. For more information, or to join the firm’s research distribution list, please send an e-mail request to research@alignmentcapital.com. In addition to published research, ACG’s investment professionals have developed numerous proprietary techniques for screening investment managers and for managing private equity portfolios.

Publications

Available for download in PDF.

Index Comparison Method (a/k/a PME)

A method used to compare private market internal rates of return with a public market index. Since its introduction this method has become an industry-standard benchmark for private equity. It is published as the public market equivalent (PME) in the Venture Economics Yearbook.

Long, Austin, and Craig Nickels. “A Method for Comparing Private Market Internal Rates of Return to Public Market Index Returns.” The contents of this paper were presented perhaps 50 times at various conferences beginning in 1994. This version, which includes a treatment explaining the use of the public markets as a private equity benchmark, was presented to the AIMR (now ICFA) conference in San Francisco in 1996.

Inferring Periodic Variability of Private Market Returns

This paper constructs a method of directly computing risk in a private market portfolio by using the dispersion in outcomes to infer periodic return volatility.

Long, Austin. “Inferring Periodic Variability of Private Market Returns as Measured by Sigma from the Range of Value (Wealth) Outcomes over Time.” Journal of Private Equity, Summer 1999, pp. 63–69.

Quantification of Reinvestment Risk in the Private Investment Portfolio

This paper shows and discusses the problems associated with receiving distributions early in a partnership’s life on a portfolio’s long-term results.

Long, Austin. “Quantification of Reinvestment Risk in the Private Investment Portfolio.” Journal of Private Equity, Spring 2001, pp. 70–78.

The Economic Value of Terms and Conditions: What Is Worth Fighting For?

This paper quantifies the “economic value” of common terms and conditions for private equity partnerships by comparing expected net returns under different sets of terms. It was originally published as an ACG research brief, then in the Journal of Private Equity.

Conner, Andrew. “The Economic Value of Terms and Conditions: What is Worth Fighting For?” Journal of Private Equity, Summer 2005, p. 64.

Persistence in Venture Capital Returns

This paper, originally published as an ACG research brief, quantifies the probability of top-quartile venture capital funds succeeding top-quartile predecessor funds and finds strong empirical evidence in favor of persistence of both outstanding and poor returns.

Conner, Andrew. “Persistence in Venture Capital Returns.” Private Equity International, March 2005, pp. 65–67.

Why GPs Should Reinvest

This paper, originally published as an ACG research brief, studies the economic effects of allowing the general partners of private equity funds to recycle a limited amount of capital and shows that recycling can enhance fund investments for both limited partners and general partners from a number of perspectives.

Conner, Andrew. “Why GPs Should Reinvest.” Private Equity International, December 2005/January 2006, pp. 64–67.

Asset Allocation Effects of Adjusting Alternative Assets for Stale Pricing

This paper applies a methodology to estimate the “true” volatility and correlations of alternative asset classes in the presence of stale pricing and describes the influence of this adjustment on the asset allocation decision.

Conner, Andrew. “Asset Allocation Effects of Adjusting Alternative Assets for Stale Pricing.” Journal of Alternative Investments, Winter 2003, pp. 42–52.

A Portfolio Management Approach to Setting Private Equity Commitments

This paper presents a new methodology for setting private equity commitments that is derived directly from expected returns and cash flow patterns to minimize both the variability around an asset allocation target and the time to reach that target.

Nevins, Daniel, Andrew Conner, and Greg McIntire. “A Portfolio Management Approach to Setting Private Equity Commitments.” Journal of Alternative Investments, Spring 2004, p. 32.

Small Funds Outperform

This April 2005 ACG research brief by Wang Cheng, FRM, CFA, analyzes the historical performance of private funds of various sizes. It concludes that smaller funds deliver higher returns than larger funds do over long time periods.

Quantifying Fund-of-Funds Performance Drag

This March 2005 ACG research brief by Craig J. Nickels, CFA, calculates the likely effect on performance to a limited partner of the second layer of fees inherent in the fund of funds structure.

The Common Mathematical Foundation of ACG’s ICM and AICM and the K&S PME

This January 2008 ACG research brief by Austin Long, MPA, CPA, JD, derives the common equations describing the workings of ACG’s Index Comparison Method (and its lesser-known Alternative Index Comparison Method) and Kaplan & Schoar’s famous Public Market Equivalent measure.

Properties of Capital Draws in Private Equity Funds

This July 2005 ACG research brief by Andrew W. Conner, CFA, discusses the statistical properties of capital calls over time.

A Method for Estimating the Change in Terminal Value Required to Increase IRR

This November 2006 ACG research brief by Austin Long, MPA, CPA, JD, derives a simple equation for estimating the movement in terminal value required to have an appreciable effect on the IRR of a private equity fund of any age.

A Method for Quantifying Concentration of Returns in Private Equity Portfolios

This January 2006 ACG research brief by Andrew W. Conner, CFA, applies Lorenz curve analysis to a portfolio of private equity in order to rigorously describe its degree of concentration and thus to make it possible to compare concentration across multiple portfolios in screening private equity opportunities

What’s in a Quartile?

This October 2004 ACR research brief by Wang Cheng, FRM, CFA, and Andrew W. Conner, CFA, examines the statistical vagaries of the private equity industry’s most frequently cited statistic.