Introducing GEM IPP™

by Michael Roth

In conjunction with Bison’s rollout of GEM IPP™, we invited Hugh Wrigley, Co-Founder and Managing Director of Global Endowment Management (“GEM”), to share some insights on how they think about PME.

We are an endowment-style asset manager and to make informed capital allocation decisions we have to be able to evaluate private equity opportunities against our public strategies. However, IRRs and vintage year quartile rankings of PE funds provide little real insight into manager alpha (loosely termed), and none into performance relative to other asset classes. Public market equivalent (PME) analysis is the only rigorous way to shine a light on the relative performance of private equity.

However, the original 1990s PMEs break in certain cases and, while more robust, their modified progeny are complicated. In 2005, Kaplan and Schoar introduced a new, robust and simple, PME methodology, but in a ratio form. Unfortunately, most asset allocation models require annualized, return-based inputs.

We were sitting around discussing this issue one Friday afternoon in 2008, when a member of our team asked, “how about we invert the question and ask how much more would the public benchmark have had to have earned to produce the same future value as the private investment?” That number would, by definition, be the annualized excess return of the private fund. Bingo.

Out of that conversation, we developed a methodology to isolate that excess return. We named it the GEM IPP™, IPP being the acronym for “implied private premium”. We’ve been using GEM IPP™ for over five years now and we were flattered when The Investment Fund for Foundations (TIFF) recently adopted it for performance analysis and client reporting following an exhaustive review of PME alternatives in which they confirmed IPP’s robustness and superiority.

You can read our short-form paper here. If you’d like the longer version or have any questions, send us an email.

All in all, we believe that isolating a manager’s or portfolio’s value add by identifying the greater terminal wealth produced by an implied private premium is a very intuitive description of the benefit of a private investment. We hope you agree.[1]

PS: For the original K&S PME paper, see KAPLAN, S. N. and SCHOAR, A. (2005), Private Equity Performance: Returns, Persistence, and Capital Flows. The Journal of Finance, 60: 1791–1823.

[1] Investment returns can be negative as well as positive.