Five trends in benchmarking private market performance: webinar recap

_{Clockwise: Fabien Chen, Head of Benchmarks, Preqin; Andrew Thompson, Partner, Head of Private Equity, APAC, KPMG; Gerard Minjoot, Analyst, Preqin; Paul Sinthunont, VP, Asset Allocation, Preqin; and Srividya Gopal, Managing Director and Southeast Asia Valuation Leader, Kroll}

Institutional investors have been increasing their allocation to alternatives as private markets have outperformed public markets in the past decade. Retail participation is also increasing.  

Endowments, which tend to be the leaders in alternatives allocation, have been allocating less to hedge funds, instead shifting to private equity, including venture capital (Fig. 1), highlighted Preqin’s Paul Sinthunont, VP of Asset Allocation at our latest Benchmarking Private Market Performance webinar. This shift in allocation has been largely due to performance. 

Fig. 1: Endowments allocate the greatest portion of assets to alternatives
All investor groups have increased allocation to private equity, except insurance companies

_{Source: Preqin Pro}

The webinar also featured a panel discussion between Andrew Thompson, Partner, Head of Private Equity, Asia Pacific at KPMG, and Srividya Gopal, Managing Director and Southeast Asia Valuation Leader at financial and risk advisory firm Kroll. Moderated by Fabien Chen, Head of Benchmarks at Preqin, the panel discussion highlighted five key trends around benchmarking.  

1. Private equity outperformance is likely to continue because of long-term value creation and management  

While outperformance can be expected, Andrew said that it may not be as easy for firms to ‘buy low, sell high’ in private equity today. The focus should be on value creation, stewardship, and mentoring to improve management teams and incentivize them for outperformance. At the same time, since management puts equity into the deals, it also hurts them when they underperform.  

For this reason, Andrew believes that the growth of private equity-backed companies is superior to that of public companies, and the industry is open to buying assets at fair or above market value, with the intention of increasing the value of the business.  

In the same vein, Srividya noted that the disparity of valuations between public and private markets could be because they have different primary or most advantageous markets. For example, private investors could focus on long-term growth prospects, whereas public investors may seek near-term profitability to pay dividends and can be slightly more prone to sentiment. It could also be because some private investment managers do not want volatility in their valuation, however this could pose a significant risk given that volatility does exist in the market. 

She said that the alternative industry today is on a journey from alternative to institutional given that retail investors are beginning to access private markets. Private markets may eventually look like public markets in terms of access, information, and distribution, etc.  

2. Convergence is happening within the asset management industry 

‘Traditional asset managers, sovereign wealth funds, and pension funds increasingly look at the alternative space not just through allocations, but by directly holding equity positions,’ said Andrew. Funds still have a higher premium over public markets, but since the premium has shrunk, it translates to higher pressure to justify the costs.  

Srividya highlighted that there has been convergence in asset classes, where funds are trying to diversify their risks. ‘This is seen where minority funds have been going into buyouts, M&A players have been setting up corporate venture capital for minority investments, and many of the private equity funds have been setting up private credit. They look at the overall portfolio and its returns,’ she said.

3. APAC private capital lags developed regions due to a lower maturity stage, but still has fundamental growth drivers  

The underperformance of APAC private capital compared to North America could simply be because it is not yet mature. ‘In APAC we are not through full investment cycles in some markets. For instance, Japan is only recently experiencing a massive private capital boom,’ said Andrew.  

However, APAC constitutes two thirds of the world’s population and wealth, and is home to the largest rising middle class. Andrew believes that there are fundamental drivers that mean that we cannot ignore APAC, including China.  

He added that there are many family-linked groups that hold a lot of assets, so you must convince them to partner with private capital managers. There are also many portfolios with unrealized value.

4. Private debt outperformed private equity for the last seven quarters

Fig. 2: Private debt outperforms private equity for the last seven quarters
Private debt relative performance vs. private equity on one-year rolling basis  

_{Source: Preqin}

Paul highlighted that we are in a unique situation where private debt has outperformed private equity (Fig. 2). ‘This is a golden age for private debt, but the question is whether it is a good vintage now going forward. We still see a lot of interest due to the liquidity that private debt offers, since in private equity there is a liquidity challenge when it comes to distributions in the current climate,’ he added.  

The valuation of private credit is a newer practice too. Srividya said that it can still be done by assessing if the loan is performing or not, as well as recalibrating it with comparable loans or benchmark rates.  

5. The exit environment is uncertain but improving  

Interest rate dislocations and geopolitical tensions have led to uncertainty and few exits, said Andrew. ‘However, we have a strong backlog of exits preparing for sale through 2025. There is no doubt that we will see a pick-up in exit markets,’ he added.  

He also said that there are more exit options available. ‘It’s not just IPOs or trade sales anymore, but secondary sales and continuation vehicles are on the rise.’

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_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}