Synthetic Peer Benchmarking for Diversified Private
Equity Programs

Abstract

Private equity is … private. This means that it can be challenging to monitor, examine, and benchmark the performance of private equity investments. As pension plans, insurers, and endowments are making private equity a larger part of their portfolios, it is becoming more important to respond to this challenge. Various methods exist to value and benchmark the performance of a single private equity fund. These include the popular public market equivalent method and peer benchmarking that compares the performance of a private equity investment with the broad private equity industry. Most institutional investors, however, have a collection of private equity investments (a diversified program); and techniques that analyze and compare the performance of a diversified program have not been readily available. Hence, investors in diversified programs are in the dark about their performance relative to the broader industry. This study has developed a simulation technique to peer benchmark diversified private equity programs, using a large universe of underlying funds. The method considers a program’s exact composition and number of holdings. It overcomes three key challenges that have prevented peer benchmarking of diversified programs until now: a lack of comparable data, a misleading practice of averaging underlying performances of individual funds, and no visibility on the drivers of out- (or under-) performance.

TOPICS: Private equity, performance measurement