In the more familiar public markets, benchmarking information is readily and instantly available. However, as asset managers increasingly look to private equity to secure returns no longer possible from traditional asset classes, they are quickly learning that this is not always the case. In this market, the benchmarking data available to measure the performance of certain types of fund is limited.
Lack of the right equipment
Measuring performance of a group of private equity funds – all funds in a portfolio or a fund of funds – presents a significant challenge.
Currently, asset managers can benchmark the performance of an individual fund in their portfolio but not the performance or exposure of an entire portfolio. Similarly, they lack the data and tools to accurately benchmark fund-of-funds investment. This gap in the benchmarking landscape makes it difficult for asset managers to assess the performance of these investments accurately and justify allocations to private equity to stakeholders, investment committees and trustees.
At present asset managers are limited to comparing fund-of-funds investment to other funds of funds. For instance, an asset manager may benchmark their investment in Alpha Fund 3 against Beta Fund 4 because they are both 2007 funds, despite the make-up being potentially very different.
If Alpha Fund 3 comprises venture capital funds with a European and US focus and Beta Fund 4 consists of buyout and venture capital funds with a US focus, the comparison is not really valid. This type of peer-group benchmarking analysis throws into doubt the reliability and transparency of investment decisions.
However, pressures to provide the comfort and transparency sought by investment committees, regulators and investors means asset managers are looking for more precise ways to evaluate private equity portfolios and fund-of-funds investments.
It is essential to be able to truly compare like with like, rather than relying on generic, broad-based comparisons. To achieve this, a new toolkit is required that enhances the capture, manipulation and analysis of data.
This can be achieved through custom-weighted benchmarks that mirror the allocation of multiple strategies, regions and vintages found in a specific fund or portfolio. Generating comparisons that are relevant will enable asset managers to evaluate existing investments more accurately and better mitigate the risk of selecting poor performers.
Tailored tools
A key part of achieving this is through access to the cash flow data underlying a benchmark, which is difficult to procure and time-consuming to compute. The alternative is to outsource the acquisition, cleansing and validation of cash flow data to a specialist.
Once sourced, this cash flow data must be weighted and aggregated in a way that precisely reflects investment strategies. Using standard tools, such as excel, is a complex and time-intensive process. Automation, in the form of a solution that can generate an exact replica of private equity investments at the push of a button, will deliver significant benefits.
An asset manager that can tailor private equity benchmarks to the precise make-up of a complete portfolio or fund of funds will provide new insight into private equity performance. Benchmarks that can be customised will enable asset managers to better evaluate performance and add rigor to decision-making processes, improving due diligence and equipping firms with the intelligence to uncover top performing investments.
Analysing data more accurately also bolsters transparency and accountability of the investment process.
Ultimately, if asset managers are to instill confidence in increasing allocations to private equity, taking a more precise approach is the only option.
