Proposing a New Metric: Private Fund Duration

Abstract

1. Rafael Castilla 1. is the director of investments and structuring at the Investment Office of the University of Michigan in Ann Arbor, MI. (rafaelec{at}umich.edu) 2. Felicia David-Visser 1. is a senior manager of investments in the Investment Office at the University of Michigan in Ann Arbor, MI. (feliciad{at}umich.edu) 3. David Brophy 1. is a professor of finance and the director of the Center for Venture Capital and Private Equity Finance in the Ross School of Business at the University of Michigan in Ann Arbor, MI. (djbrophy{at}umich.edu) The authors propose a tripartite metric, private fund duration (PFD) (PFD x , PFD y , PFD z ), to assist investors in the analysis of the duration of private funds and investments. In brief, PFD x is the amount-weighted average time of all the contributions to a fund or investment, PFD y is the amount-weighted average time from inception for the fund or investment to return its capital (when distributions equal contributions), and PFD z is the amount-weighted average time for all distributions. An example PFD can be written in years, thus: PFD (3.4, 5.1, 8.0). The authors argue that the PFD is the missing metric that with the multiple on invested capital (MOIC) and the internal rate of return (IRR) can provide a complete summary picture of the cash-flow characteristics of a private fund or investment. The PFD can be used in the monitoring, analysis, and comparison of different private fund and investment opportunities, trends, structures, and strategies, particularly with respect to liquidity and outstanding commitments. The [Online Supplement][1] illustrates one application of PFD using Burgiss data in different asset classes for different vintages: creating benchmarks for PFD. [1]: http://jpm.pm-research.com/lookup/suppl/doi:10.3905/jpm.2022.1.397/-/DC1/jpm.2022.1.397_JPM-Castilla.docx