How would you benchmark a fund's performance against its peers, and why isn't IRR alone enough?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
You benchmark against the right vintage-year peer set, because comparing funds raised in different years ignores the macro environment they invested in. Use a suite: IRR and MOIC/TVPI for absolute return, DPI for realized cash actually returned (distinguishing paper gains from realized), and quartile rankings within the vintage. Crucially, compare to public markets with a PME (Public Market Equivalent) — it answers 'did the fund beat just buying the index with the same cash-flow timing?', stripping out the benefit of a rising market. IRR alone isn't enough because it can be flattered by early distributions or subscription lines, ignores the scale of capital (a high IRR on tiny capital matters less), and says nothing about how much is realized. So you triangulate IRR, MOIC, DPI, quartile, and PME against the correct vintage.
WHAT INTERVIEWERS LISTEN FOR
- ✓Benchmark within the correct vintage-year peer set
- ✓Use IRR + MOIC/TVPI + DPI + quartile together
- ✓PME compares to public-market alternative
- ✓IRR alone ignores realization, scale, and can be flattered
COMMON MISTAKES
- ✗Comparing across mismatched vintages
- ✗Relying on IRR alone
- ✗Ignoring DPI/realization and PME
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