How Preqin Helps You Benchmark: Public vs. Private

by Preqin

  • 22 Aug 2018
  • PE
  • VC
  • HF
  • PD
  • RE
  • INF
  • NR

This series looks at the tools available on Preqin’s online platform that can to help you to effectively benchmark your funds or portfolio. Part one examined how you can use our market benchmarks and create custom benchmarks to track the funds that are most relevant to you. However, comparing funds of the same asset class against one another is unlikely to give you the full picture of performance that you need: it is also important to be able to compare performance between asset classes, as well as between private and public markets, to be able to understand your entire investment portfolio.

Public Equivalents
While equating the performance of hedge funds to public indices is a relatively straightforward endeavour, it remains an ongoing challenge for private capital vehicles. Most commonly, they rely on the Internal Rate of Return (IRR) to assess performance, while public markets are measured by time-weighted returns. A number of public market equivalent (PME) methodologies have been developed to allow for the comparison of private capital fund returns against public market indices, and we offer three different PME measures to help you evaluate closed-end fund performance.

Each one – Long Nickels, Kaplan Schoar and Capital Dynamics PME+ – is designed so that you can compare a specific fund or group of funds to a given public index. For instance, you could either see if an individual fund has beaten the market, or evaluate whether emerging markets-focused private equity has outperformed the MSCI Emerging Markets Index.

This enables investors to see whether an individual fund or a portfolio has outperformed the market, and allows fund managers to directly demonstrate how they compare to public indices. Moreover, having several measures side by side means that you can get a holistic view of how public and private markets compare, and can balance the weaknesses of the individual PME measures.

Long-Term Indices
PMEs allow you to compare specific sets of funds against specific indices; but sometimes it is more appropriate to look at how private funds are performing in general. There are very few accurate ways to measure private capital performance over time, but one of the foremost is the PrEQIn Quarterly Index.

The PrEQIn Quarterly Index shows private capital returns over time which can be compared like for like to a public index. It operates by rebasing to a starting point and tracking the basis point returns of a theoretical ‘average’ fund, and then comparing those to the returns of public indices.

The advantage is that it allows you to compare multiple asset classes, regions, fund types and public indices in one place, rather than by making specific direct comparisons. This multi-way comparison looks at multiple asset classes and indices simultaneously, thereby making it easier to view general trends over time.

The Index can be tailored to include only specific regions or fund types; you can even compare buyout funds of different sizes or early- vs. late-stage venture capital. It can also be rebased to any timeframe, allowing you to focus on a specific period.

Under the Hood
As shown in part one, Preqin provides you with detailed performance information about alternative assets funds, and as discussed here, enables you to put that performance into context and compare it to other markets. In our final instalment, published on Friday, we look at how Preqin can help you to calculate exactly how much you can expect your fund investments to return to you across their lifecycle.

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