The PERACS Calculator

Background

PERACS is a leading service provider of quantitative analytics for the private equity industry, helping both GPs and LPs achieve a better understanding of the value drivers behind private equity investments in an objective and independent manner.
Founded in 2011 by Professor Oliver Gottschalg on the basis of more than a decade of in-depth industry research at HEC.
Out of the 100 largest private equity GPs, 22 engaged us for analytics services since 2011.

Quantitative methodology & general applications

Proprietary analytics: PERACS’ proprietary PE Due Diligence AnalyticsTM is an exceptionally powerful method for identifying key attributes of performance, risk profile and strategic differentiators with an innovative statistical benchmarking algorithm.
The 5 metrics: A comprehensive set of standardized, quantitative metrics is generated at the deal, fund and portfolio level.
General Partners: Use PERACS to enhance fundraising effectiveness and efficiency, crystalizing the firm’s competitive positioning and ongoing investor communication.
Limited Partners: Use PERACS to provide unique perspectives into portfolio risk and return profile with applications in portfolio design, investment decision support and performance optimization.

Functionality

The PERACS Calculator is a tool that can be used by Limited Partners to calculate two key PERACS metrics:

1. Performance (PERACS Alpha and PERACS Rate of Return)

Public-Market Equivalent (PME) Benchmarking Perspective
Enhanced Performance Measurement, avoiding issues with IRR Methodology
Comparison to Benchmarks

2. Risk Profile (PERACS Risk Curve)

Assessment of portfolio risk based on historical return distribution across the portfolio
Graphical representation based on intuitive curve inspired by “Lorenz Curve”
Comparison to Benchmarks

Applications

The calculations and results derived from the PERACS Calculator assist LPs in 2 key areas:

1. Existing investments: The analysis of their own portfolios with underlying funds for monitoring purposes; and

2. Prospective investments and due diligence: The due diligence of a GPs track record with funds and underlying deals. We have built two versions of the calculator to offer benchmarking functionalities in each of these areas.

Streamlined workflow & basic data requirements

Input: The LP has to provide only a simple set of cash flows (Fund name, date, cash flow amount, cash flow type) in a standard Excel format as input and can then easily perform the aforementioned risk and return calculations.
Output: The tool provides the results in numerical and graphical format and the user can manage the output using standard pivot-tables in MS Excel.
General Partners: Use PERACS to enhance fundraising effectiveness and efficiency, crystalizing the firm’s competitive positioning and ongoing investor communication.
Dynamic and adaptable: Importantly, the results can be flexibly “slices and diced” according to user preferences. To this end, a set of deal- or fund-level characteristics (vintage year, stage, region, industry, etc.) can be either sourced automatically from 3rd party databases or entered manually by the user.

Examples

Summary performance results in table format

Fund quartile assessment results in table format

The PERACs Alpha and PERACS Rate of Return

A GP’s “PERACS Alpha” is a measure of pure value generation:

1. it is corrected for the biases of standard IRR;

2. expresses returns relative to the ‘opportunity cost’ of not investing in the public market; and

3. unlike IRR, has a high correlation to future performance.

*PERACS Rate of Return = (MOIC ^(1/Duration in years))-1

The PERACS risk curve

Insight: Overall assessment of the distribution (uniform vs. exponential) of returns in the portfolio as a novel risk measure for PE portfolios

Benchmarking: Comparison with average performance distribution from HEC PE database, base on different portfolio characteristics.

If you are interested in learning more about what our Fund performance analytics team can do for you, click here.