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The problem with TVPI and IRR alone

Total value to paid-in and IRR describe a fund's own cashflows, full stop. They say nothing about what else you could have done with that money over the same period. A fund that returned 2.0× over eight years during a strong public-market run may have simply matched the index with extra fees and lockup on top; a fund that returned 1.5× during a down market may have meaningfully beaten it. Comparing raw multiples across vintages without a benchmark is comparing funds that lived through completely different markets as if they didn't.

The fix, worked out in the academic PE literature over the past two decades, is to discount a fund's own cashflows by what a public-market index actually did on those same dates, instead of a flat assumed rate. Two versions of that idea are now standard, and Equisect computes both.

KS-PME — the multiple version

Kaplan and Schoar's Public Market Equivalent (Kaplan & Schoar, Journal of Finance, 2005) answers a simple question: if every dollar you actually called into this fund had instead been invested in the public market on that exact date, and every dollar the fund distributed had instead been withdrawn from that same public-market position on that date, how would the two compare? Take the fund's actual distributions plus its residual NAV, each grown forward at the public market's real realized return since the date it happened; divide by the fund's calls, grown forward the same way. A KS-PME above 1.0× means the fund beat the market on a dollar-weighted basis; below 1.0× means it lagged, even if the fund's own TVPI looked fine in isolation.

Direct Alpha — the annualized-rate version

KS-PME is a multiple, which makes it awkward to compare against a required return or blend across positions of different lengths. Direct Alpha (Gredil, Griffiths & Stucke, Benchmarking Private Equity: The Direct Alpha Method) solves the same economic problem but reports an annualized excess return instead — a number you can read next to an IRR. The construction mirrors an ordinary IRR calculation: instead of solving for the flat rate that sets a fund's cashflows to zero net present value, Direct Alpha solves for the flat excess rate over the benchmark that does — each cashflow is first compounded by the benchmark's own return path to a common date, which cancels out the benchmark's own fluctuations and leaves only the fund's edge (or shortfall) over it. A positive Direct Alpha means the fund cleared the public market by that many points a year; negative means it didn't.

How Equisect computes it

Both numbers need a fund's real calendar-dated quarterly cashflows — not just its age — checked against a real public-market benchmark on those same dates. We use a US public-market total-return series, computed fresh at request time against whichever quarters the fund actually has. That's also why alpha exposure only shows up on the portfolio / file upload pricer: it's the only one where an uploaded fund carries its own dated quarter-by-quarter call, distribution, and NAV history. A single manual snapshot has no history to discount, and a warehouse fund lookup reads pre-summarized stats, not a full per-quarter series — neither can support a real backward-looking alpha number, so neither shows one.

Why it's worth checking

A fund can look excellent on TVPI and still have been a mediocre place to put capital once you account for what the market did over the same stretch — and the reverse is just as common. If you're pricing a secondary, the seller's own reported multiple tells you how the fund did in isolation; KS-PME and Direct Alpha tell you whether that performance was actually worth the illiquidity, relative to the liquid alternative you gave up to get it.

Research and software, not investment advice.