Does Infrastructure Provide the Benefits Investors Expect?

By: Avi Turetsky, Alinah Shahid and Nicholas Keywork

Institutional investors are increasing allocations to infrastructure investments. According to Preqin, infrastructure private equity funds have grown from $34 billion of unrealized value in 2007 to $270 billion in 2017. In public markets, no infrastructure indices existed prior to the 1990s. Today there are more than 25 of them.

A Glimpse into the Afterlife: An Investigation into Private Real Estate Fund Legal Term, Extensions & Liquidation

By: Ira Shaw and Halle Marra, in collaboration with Jacob Sagi, Kenan-Flagler Business School, University of North Carolina at Chapel Hill

Private equity real estate investors have the option of investing in the asset class through two common structures: the open-ended “evergreen” fund and the closed-end fixed-life fund. Industry group NCREIF indexes select open-ended “core” funds invested in the U.S. A market index, NFI-ODCE, reported outstanding net asset value (“NAV”) totaling $178 billion at December 31, 2017, across 24 open-ended core funds.

Quartiles vs. Mean-based Benchmarks

By: Avi Turetsky and Alinah Shahid

What is the best way to measure private equity fund performance? This question stands at the core of the fund selection process. In our experience, industry participants traditionally use a simple method, which is to calculate the internal rate of return (IRR) or total-value-to-paid-in capital (TVPI) of a fund, and then to benchmark this figure against a peer set of funds, using quartiles.

It’s About Time: Duration Matters

By: Christopher Bass, Avi Turetsky, Barry Griffiths

Illiquidity is a problem for private equity investors for several reasons. First, and most obvious, there might come a time when an investor would rather have cash than an interest in a private partnership. More generally, when a private equity fund is illiquid for a long time, an investor doesn’t have the option to rebalance the portfolio or to change managers. Investors in publicly-traded securities take these options for granted, while private equity investors must carefully consider what these options are worth.

If Taxes on Carried Interest Go Up, Who Will Foot the Bill?

By: David Robinson, Landmark Fellow (The Fuqua School of Business, Duke University)

General partners in private equity are taxed differently than many other types of people in the economy. They pay ordinary income tax on the fee income that they receive in the partnership, but pay the lower capital gains tax rate on the carried interest they earn from the partnership’s investments. The fact that GPs can generate fabulous wealth and face relatively little in tax liability is a constant source of consternation among politicians and other observers of the industry. This seems to violate the most basic tenets of fairness: how is it that the super-wealthy pay so little in tax, while those who earn income through salary pay so much more?  Why should a private equity executive pay so much less in tax than a doctor or a surgeon?

The Changing Face of Early Stage Investing

By: Yael Hochberg, Landmark Fellow (The Jesse H. Jones Graduate School of Business, Rice University)

The last five years have seen expansive changes in the early stage investing landscape, particularly in software. These changes have been driven by fundamental changes in the nature of startup companies and how they are built, the adoption of internet and mobile on a global scale, and the movement to cloud-based infrastructure. In this white paper, we discuss these catalysts and the changes they have wrought on the early stage investment landscape in general and on the venture capital (“VC”) industry more particularly. These changes have led to a bifurcation of the VC industry into two major segments. Each of these segments will likely hold appeal for a different set of investors.

Navigating Uncertainty: Diversification for the Alpha-Centric Portfolio

By: Barry Griffiths and Sean Silva

As allocations to private equity have increased in recent years, institutional investors have begun to face three related challenges:

  1. How can an investor construct a private equity portfolio that adds value compared to investments in more liquid asset classes?

  2. How can the investor execute such a strategy?

  3. What kind of monitoring program is appropriate for measuring this added value?

Historically, investors have used a variety of ad hoc approaches to these problems. Some investors have created top-down style buckets (e.g. US LBO versus European LBO versus global VC) and mandated some aggregate number of commitments per bucket each year. Other investors only invest with private equity groups that are thought to offer exceptional opportunities. Some investors have tried to measure the performance of each fund, or each style bucket, on a yearly basis, while others have used longer periods. Each of these approaches has its pros and cons, but the relationships between them have often been misunderstood.

The Effects of Carry Timing on VC Performance

By: David Robinson, Landmark Fellow (THE FUQUA SCHOOL OF BUSINESS, DUKE UNIVERSITY) and Barry Griffiths

Our findings suggest that deal-by-deal carry terms generate far higher returns for LPs than whole-fund terms, at least in venture capital. Part of the explanation for this finding is the more obvious fact that better-performing GPs command better terms. Historically, LPs have been better off paying higher prices in order to affiliate with higher-quality GPs, at least on average.  However, a second key factor lies in the incentives each set of terms creates. The exit patterns from portfolio investments suggest that deal-by-deal contracts, despite being thought of as GP-friendly, actually provide better-aligned exit incentives than whole-fund contracts.  This has important implications for LPs investing in private equity.

Understanding Liquidity in Private Capital Markets

By: David T. Robinson, Landmark Fellow (THE FUQUA SCHOOL OF BUSINESS, DUKE UNIVERSITY) and Barry Griffiths

By how much should private capital markets outperform public capital markets in order to justify the added risks imposed by illiquidity?  In other words, what is the market price of illiquidity in private capital markets? In this research note, we review recent academic work attempting to tackle this question, as well as emerging trends in the marketplace that affect the price of liquidity.

The theoretical work suggests that a 2% to 3% per annum premium over public equities is required merely to compensate investors for the liquidity rebalancing risk they face in private equity.  A growing body of empirical evidence indicates that this is almost exactly what investors earn on average.  Of course, both the theoretical and empirical work rest on detailed assumptions required to conduct their analyses. The remainder of this white paper discusses these in greater detail and concludes with some broader implications of their findings.

Real Estate Private Equity Funds: How Useful Are Class Distinctions?


Despite the fact that classes of funds differ in investment composition, in this paper we show that class has not been a reliable differentiator of performance between Value-Added and Opportunistic funds. In our review of individual fund histories from vintages between 1980 and 2008, average performance does not differ between the two classes. This holds overall, for different periods and for different metrics of performance. To vet funds, investors should more specifically evaluate fund strategies and management quality.

Searching for Performance in VC Funds

By: Yael V. Hochberg, Landmark Fellow (THE JESSE H. JONES GRADUATE SCHOOL OF BUSINESS, RICE UNIVERSITY) and Barry Griffiths

Investors considering a new commitment to the venture capital sector face the difficult task of trying to determine which managers are likely to be outperformers in a crowd of funds, in a high-risk, high-uncertainty investment space where it is often difficult to distinguish skill from luck. The realized interquartile spread across managers is large, and top, brand-name funds are often closed to new investors. How can limited partners (LPs) sort between funds and fund managers? What characterizes funds that are more likely to have high performance? In this paper, we discuss recent evidence on the drivers for performance of VC funds, as well as other issues for consideration by LPs seeking to enter, or expand their presence, in venture.

Benchmarking Private Equity: The Direct Alpha Method

By: Oleg Gredil, Landmark Fellow (The Freeman School of Business, Tulane University) and Rüdiger Stucke, Landmark Fellow (Warburg Pincus) and Barry Griffiths

This paper shows that the existing methods to calculate annualized excess returns are heuristic in nature, and proposes an advanced approach, the ‘Direct Alpha’ method, to derive the precise rate of excess return between the cash flows of illiquid assets and the time series of returns of a reference benchmark. Using real-world fund cash flow data, this paper finally compares the major PME approaches against Direct Alpha to gauge their level of noise and bias.

Searching for Outperformers: What metrics actually work?

By: Rüdiger Stucke, Landmark Fellow (Warburg Pincus), Barry Griffiths and Ian Charles

Investors considering a new commitment to private equity face a difficult task. All investors agree that they want to invest with “outperforming managers.” But how can they tell who these managers are likely to be? When investors are asked to commit to a manager’s next fund, the current fund has only been invested for a short period, and older funds may have been invested under substantially different market conditions. In this paper we demonstrate that it is possible to identify outperforming managers relatively early in the lives of their funds, even though much of the conventional wisdom about performance statistics in private equity is untrustworthy at best.

Do Waterfall Provisions Affect the Timing of Distributions? Theory and Evidence

By: David Robinson, Landmark Fellow (THE FUQUA SCHOOL OF BUSINESS, DUKE UNIVERSITY) and Barry Griffiths

Understanding the sensitivity of private equity cash flows to the business cycle and other factors is an important topic for investors and academics alike.  Most of the cash flow models used by private equity investors and practitioners are simple functions of time. In this paper, we show that the incentives to general partners (GPs) created by the so-called waterfall provisions are an important factor in the timing of distributions.  In particular, we show that exits and distributions come much faster once the GP has reached the carry.

In the remainder of this white paper, we first discuss waterfall provisions and how they may influence the timing of distributions.  Then we describe the empirical strategy that we use to measure how incentives change around the waterfall, followed by our findings. Finally, we conclude by offering some caveats and broader take-aways from the work.

Private Equity Portfolio Management: “An Inconvenient Truth: Secondary vs. Primary Fund of Funds”

By: Scott P. Conners, Barry Griffiths and Edward Keith

The purpose of this white paper is to outline some of the similarities and differences between Primary FOFs and Secondaries from the standpoint of a new private equity investor. As a Secondaries fund manager since 1989, Landmark Partners is in a unique position to provide a comparative assessment of the sub-asset classes.  Our analysis of the return, timing, and diversification attributes associated with Primary FOFs and Secondaries suggests that Secondaries have characteristics that can be beneficial to many investors, especially those starting new programs. Our research also shows that the conventional wisdom suggesting that the shorter duration of Secondaries leads to lower return multiples than Primary FOFs is incorrect.

Private Real Estate Portfolio Management: “Commitment Planning: Liquidity Constraints”

By: Paul Mehlman, Barry Griffiths, Ian Charles, Michelle Creed and Joseph Nasr

We believe there are three key steps to establishing a liquidity constraint in commitment planning:

1)           Define the situations a portfolio should tolerate;

2)           Integrate liquidity constraints in commitment plans; and

3)           Evaluate the portfolio’s liquidity prior to every new commitment

Each investor has a different time horizon, target return and overall portfolio objective.  As a result, each investor will face different circumstances in a crisis scenario.  For purposes of this discussion and to demonstrate the liquidity constraint, we will use a few simple examples that may help guide an investor’s thoughts.

Private Equity Portfolio Management: “Commitment Planning: Finding Alpha”

By: Barry Griffiths and Ian Charles

In this white paper we will discuss some of the evidence that a sub-set of investors are able to harvest positive alpha, even though private equity in aggregate appears to have none. We will also discuss some of the limitations of popular approaches to fund selection, and why so many investors make suboptimal decisions. Rather than leave our audience with more questions than answers, we will discuss a new algorithm for estimating alpha in private equity that takes advantage of the kinds of information that private equity investors typically possess, without requiring information that they cannot know.  Finally, we will demonstrate how this algorithm can be used to measure a limited partner’s ability to find and harvest alpha as well as a general partner’s capacity to create alpha for its investors.

Using this new tool for estimating alpha, private equity investors can improve their fund commitment process. Some investors might even come to the conclusion that their current process hasn’t actually captured any alpha, which would likely lead to an entirely different conversation. We think that this tool can be a valuable part of an informed investor’s due diligence process and have incorporated it into Landmark’s LP Analytics Toolkit.

Private Equity Portfolio Management: “Commitment Planning: Liquidity Constraints”

By: Barry Griffiths, Ian Charles and Joseph Nasr

During interactions with leading institutional investors, many of whom were battered by the Great Equity Meltdown, we noticed an increased focus on liquidity - what it means, how much is needed and how to avoid future illiquid situations. Before 2010, most investors used a variety of asset allocation models to optimize exposure to various asset classes in order to generate some expected rate of return or to maximize returns given an expected risk budget. One common theme we’ve seen is that some investors made very large commitments to private equity and other illiquids, because they viewed these investments as an opportunity to generate high returns and diversify their portfolios. Unfortunately, their commitments were made in absolute dollars, and when the value of their overall portfolio fell substantially (as many did in 2008 and early 2009) the undrawn portion of their commitments represented an unexpectedly large fraction of their overall portfolio value.  In some cases, investors found that there was a real risk that they would not have sufficient liquidity to pay their undrawn capital as it was called and generate the portfolio income required to meet other organizational objectives. For a variety of reasons, certain types of investors are naturally more exposed to these liquidity shocks than others and, as a result, need to assess their liquidity situation throughout the commitment planning process.