Proposing a New Metric: Private Fund Duration

Abstract

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 illustrates one application of PFD using Burgiss data in different asset classes for different vintages: creating benchmarks for PFD.