Benchmarks, Private Markets’ Beast of Burden No Longer

As the Rolling Stones sang back in the 60s, you can’t always get what you want. But when it comes to private markets, that’s becoming less true. 

For years, private markets were reserved for wealthy and institutional investors. Now, everyday folks saving for their retirement, down payments and more are being offered increasing opportunities to engage with private equity, private credit and other alternative investments. But while the public markets have prices that are continuously updated, valuations for private assets are typically reported quarterly, and the data often lags. Factors also vary across private market funds that make apples-to-apples comparisons difficult. 

The ability to assess whether a private asset fits into a portfolio, however, is what investors want: 78% of affluent investors say benchmarks boost their confidence in private markets, and 92% say benchmark comparison is important when evaluating returns, according to a survey earlier this year from FTSE Russell. 

“A benchmark turns a private-market pitch into a measurable trade-off,” said financial advisor Mitchell Dyer of Dyer Private Wealth Management. “Without transparent comparisons that account for fees, risk and illiquidity, investors may be unable to tell whether they are being adequately compensated.” 

(I Can’t Get No) Comparison   

A lot of advisors use public-market benchmarks as a “good enough” equivalent, said Courtney Scharff, MSCI’s head of private-asset indexes and taxonomies. But benchmarking a private portfolio to a public benchmark is creating a “really big mismatch,” since the public benchmark doesn’t account for things like cash flow or the specific structure of a fund. 

“That public benchmark is actually more like an opportunity-cost benchmark,” Scharff said. “It’s showing what you could have gotten if you had just gone into the public market. … It doesn’t actually tell you your performance relative to the market you’re in.” 

But that’s changing: 

• MSCI is creating benchmarks by collecting, anonymizing and aggregating data from limited partners (private fund investors) and general partners (fund managers).
• Last year, FTSE Russell and StepStone Group teamed up to launch private market indexes that reflect daily fund-level activity. 
• S&P Global collaborated with investment firms Cambridge Associates and Mercer last year to offer comprehensive private market performance analytics. The first datasets, released in March, introduce standardized data across thousands of funds and their underlying assets. 

Can’t You Hear Investors Knocking. As more individual investors participate, benchmarks will be built more around how they actually invest, said Brad Walker, co-president at CAIS, an alternative investment platform. He said he expects more rules-based, independently calculated benchmarks that sit alongside the traditional institutional data, benchmarks organized by strategy and by structure, and technology that puts benchmark context next to the investment itself, so advisors are not assembling it from separate sources.

Maybe private-markets investors, if they try sometime, will find they get what they need.