The University of Michigan is the latest public institution to release fund-by-fund performance data from its private equity portfolio. Like its predecessors, the school was compelled to do so following Freedom of Information Act requests. What follows on page 14 are the internal rates of return (IRRs) for buyout and venture capital funds within the U of M portfolio, along with comparable performance benchmark data from Venture Economics (publisher of PE Week). No underlying asset information was released.
“Our investment partners recognize that the industry as a whole is moving down a path toward more disclosure,” says Julie Peterson, a school spokeswoman. “Currently there are no agreed-upon industry standards that govern the release of such information. When specific requests for information have been directed to the [university], we have worked diligently to keep our partners informed in advance of information disclosures, and have listened carefully to their concerns.”
She adds that none of U of M general partners have sued the school and that investment managers like CIO Erik Lundberg would not be available to comment on the matter.
U of M Disclaimer:
Young funds typically show negative returns due to the J-curve effect of the management fee on fund returns. Additionally, the value of investments with reduced profit potential often are written down, while promising investments have not yet had time to experience events that warrant an upward revision in value, such as a subsequent round of financing, and therefore are held at cost. The impact of any change in valuation of an underlying investment can have an outsized impact on a fund’s return because of the often-low invested base in the early life of a fund.
Comparing the returns across younger funds can be misleading. There is no industry standard for valuing private companies, and valuations of similar companies may vary from fund to fund based on a subjective measure of value. The IRR becomes more meaningful as a fund matures, as the calculation relies less on subjective valuations and more on actual distributions of cash and stocks.