Private equity is an investment strategy that involves pooling funds from various sources to acquire ownership in private companies. This form of investing has gained popularity due to its potential for high returns, but it also comes with risks and uncertainties. To gauge the performance of private equity investments, investors often rely on benchmarks. These benchmarks provide a reference point against which fund managers’ performance can be evaluated. In this article, we will explore some commonly used private equity performance benchmarks.
1. Cambridge Associates Private Equity Index (CAPEI):
The CAPEI is one of the most widely recognized benchmarks in the industry. It represents the average net-of-fees return earned by private equity investments over time. The index covers multiple vintage years and provides a comprehensive view of the overall market performance.
2. Burgiss Private Equity Indices:
Burgiss offers several indices that track different segments within the private equity universe, such as venture capital, buyout, real estate, and fund-of-funds strategies. These indices cover various geographic regions and vintage years to provide more granular insights into specific sectors or markets.
3. Thomson Reuters Private Equity Performance Index (TRPEPI):
TRPEPI tracks the performance of global private equity funds by analyzing cash flows and valuations reported by participating funds. It includes both realized and unrealized returns to capture the full investment life cycle from initial commitment to final distribution.
4.Preqin Performance Benchmarks:
Preqin is a leading provider of data and intelligence for alternative assets including private equity investments. They offer a range of benchmarking tools that allow investors to compare their portfolio’s performance against industry standards across different strategies, sectors, and geographies.
5.Global Investment Performance Standards (GIPS) Compliance:
While not specifically a benchmark itself, GIPS compliance ensures that firms adhere to rigorous standards when reporting their investment results. By selecting managers who are GIPS compliant, investors can have confidence in the accuracy and consistency of their reported performance.
6. Public Market Equivalent (PME):
PME is a benchmarking methodology that compares the performance of private equity funds to equivalent investments in public markets, such as stocks or bonds. By adjusting for risk and time horizon differences, PME allows for a more meaningful comparison between private equity returns and those of traditional asset classes.
7. Vintage Year Returns:
Vintage year returns focus on the performance of funds raised in a specific year. This benchmark helps investors assess how well a particular vintage performed compared to others within its peer group. It takes into account market conditions at the time of fundraising, which can impact overall returns.
8.Benchmarking against Peer Groups:
Comparing fund performance against similar peer groups is another common approach to benchmarking in private equity. Investors may define their own peer groups based on factors like strategy, vintage year, sector focus, or geographic location. This method provides a more customized benchmark that aligns with an investor’s specific investment preferences.
It’s important to note that while benchmarks provide valuable reference points, they should not be the sole basis for investment decision-making. Each investor has unique goals and risk tolerance levels that may differ from industry standards. Moreover, private equity investments are illiquid and long-term in nature, making it crucial to consider other factors such as fund manager expertise and track record before making any investment decisions.
In conclusion, private equity benchmarks serve as useful tools for evaluating fund performance relative to market standards. The CAPEI, Burgiss indices, TRPEPI, Preqin benchmarks,GIPS compliance,PME,Vintage Year Returns,and Peer Group comparisons are among the most commonly used benchmarks by investors and industry professionals alike.It’s important for investors to understand these benchmarks’ methodologies along with their limitations when assessing potential investments in this alternative asset class