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.