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How Reliable Are Private Equity Fund Valuations?

A study by three authors at the University of Oxford (UK), published in February 2013, concluded that investors in new PE funds “should be extremely wary of basing investment decisions on the [reported] returns…of the current fund.”

The study of 761 fund investments made by CalPERS (the largest U.S. investor in PE) found that PE fund managers tend to inflate the valuations of current funds during fundraising for follow-on funds, so that “the performance figures reported by funds during fund-raising have little power to predict ultimate returns,” especially when performance is measured by internal rate of return.

In their paper titled “How Fair are the Valuations of Private Equity Funds?” the authors, Tim Jenkinson, Miguel Sours, and Rudiger Stucke, said:

The ultimate performance of private equity funds is only known once all investments have been sold, and the cash returned to investors. This typically takes over a decade. In the meantime, the reported performance depends on the [interim] valuation of the remaining portfolio companies. Private equity houses market their next fund on the basis of these interim valuations of their current fund.

Jenkinson, Sours, and Stucke concluded that these interim valuations tend to be conservative and “fair” until they start raising money for the next fund, when they “are inflated during fundraising.”

The study is available at We at AIMkts advise that you exercise caution when you review valuation reports presented by PE funds, whether it’s during fund-raising or otherwise. We do not attempt to confirm or refute the conclusions of this Oxford study, i.e., we don’t contend that any particular fund, or that funds in general, inflate valuations.

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About David M. Freedman

David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…

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