2018 Performance Monitor: Private Capital vs. Public Markets

by Preqin

  • 06 Sep 2018
  • PE
  • VC
  • PD
  • RE
  • INF
  • NR

To celebrate the launch of The 2018 Preqin Alternative Assets Performance Monitor, we will be releasing a series of blogs to highlight the key findings of the report and shed light on the current performance of the alternative asset industry. Our first blog in this series takes a closer look at the returns generated by private capital funds compared to public indices and examines how private capital strategies provide value over the longer term.

Many investors have become more sophisticated in both experience with, and resource dedicated to, in-house investment teams. This has led to investors increasing their allocations across the private capital space, as well as institutions entering these markets for the first time. In doing this, institutions hope to achieve greater overall portfolio returns, which could not otherwise be achieved in a low interest rate environment. Aside from strong returns, institutions look to add to and increase the number of financial instruments within their portfolios to meet objectives such as diversification, high risk-adjusted returns, reliable income streams and inflation hedging. The general sentiment appears positive across most private capital asset classes, especially when it comes to portfolio performance.

Benchmarking private capital asset classes has long been a multifaceted approach across investors of all types, sizes, locations and levels of experience and sophistication. Some investors use net IRRs or net multiples and compare against peer groups, others use absolute return, and many will create proprietary in-house benchmarks or use third-party benchmarks like Preqin. More and more investors and consultants today are actively adopting public market comparisons with their private capital portfolios to get a more ‘apples-to-apples’ comparison and comprehension of their portfolio directly against public market indices.

Preqin’s ‘Cash Flow’ tool can be used to compare private capital returns across all asset classes against key public market indices, as seen in the chart above. For the one-year horizon returns to December 2017, the S&P 500 TR Index outperformed private capital. Over the three-, five- and 10-year periods, private capital returns have exceeded both the MSCI Emerging Markets Index and MSCI Europe Index, again highlighting their illiquid nature and medium- and long-term return and volatility-reducing potential within the institutional portfolio.

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