Introduction to Private Capital Performance Benchmarks and Indices

Private markets are more transparent than ever before, as data analytics have improved and benchmarking solutions have emerged. In this lesson we cover the fundamentals of private capital benchmarks, including the most common performance metrics and peer group benchmarks. We’ll also explore why benchmarking is important for the alternatives industry, and the qualities of a reliable benchmark.  

What is a private capital benchmark?

A benchmark is a standard used to assess how well a fund or portfolio is performing in comparison to others across the market. As private markets grow in size and prominence, limited partners (LPs) increasingly expect better, more reliable data to accurately evaluate how their investments are faring. Meanwhile, fund managers use benchmarks to measure their performance against that of their peers. 

What is a private capital index?

Before turning to how indices are used in private markets, let’s first understand what an index is. A market index is a reference point used to track the movement and performance of a specific segment within financial markets. The value of a market index is calculated based on the prices of a portfolio of investments representing that segment.

The segment of interest may be a type of financial instrument, such as shares or bonds in public markets. A popular stock market index is the S&P 500, which tracks the performance of 500 leading publicly listed companies in the US and is weighted toward companies that are the largest by market capitalization.

A market index may also focus on a specific sector. The Nasdaq Composite Index, or “The Nasdaq”, is often cited in the media as an indicator of how well the US technology sector is performing, as major technology companies – including Apple, Microsoft, Amazon, and Alphabet – make up almost half of the market cap weighting in this index.

Like investors in public markets, investors in private markets use indices to compare performance as a basis for allocating assets and managing their portfolios. The Preqin Private Capital Indices, for example, capture the average return private capital investors earn from their portfolios in a specific quarter.

Use our interactive chart below to compare private capital performance to a public market index.

What is the difference between a benchmark and an index?

You may have heard the terms ‘benchmark’ and ‘index’ used interchangeably. In practice, however, it’s important to remember they are different concepts. There are various types of indices used in both the public and private markets.

An index is a calculation representing a basket of securities. These securities may be a specific asset class, financial market, or segment of that market.  

• In public markets, the S&P 500 index tracks the performance of 500 leading publicly listed companies in the US, weighted toward the largest businesses by market capitalization.  

• In private markets, Preqin’s Private Capital Indices track the average returns private capital investors earn from their portfolios every quarter. Preqin’s 46 indices span six asset classes, capturing returns worth over $11.3tn in market capitalization across more than 14,500 funds.

A benchmark is a type of index used as a reference point for comparative purposes.  

• A limited partner(LP) or investor, may use a benchmark to evaluate a fund’s risk-return profile by comparing how it has performed relative to other funds with similar investment criteria.  

• A general partner (GP), or fund manager, may use a benchmark in their marketing materials, to promote how well their funds have performed relative to those of their peers.

• A service provider (SP) offers a range of advice and services to both fund managers and investors. How SPs use benchmarks will often depend on their clients’ objectives. 

For example, an SP helping an investor with fund manager selection may look for a benchmark that is customizable as well as transparent and reliable. A customizable benchmark enables the SP to compare a GP’s performance against like-for-like competitors.  

Evaluating performance relies on robust, reliable data. Preqin offers the largest selection of fund performance benchmarks in private markets, underpinned by 50+ years of returns data.  

Users can select from 140,000+ benchmarks developed across combinations of vintage, geographic focus, strategy, and fund criteria. Preqin also provides the only ESG fund performance benchmarks in the market, spanning seven ESG labels across six asset classes.  

Why are private capital benchmarks and performance data important? 

Tools that calculate and display performance data are fundamental when it comes to making private markets more transparent. By understanding the performance of individual funds or portfolios in relation to peers in the broader market, investors have visibility on how successful their investments have been. They also gain insight into whether an allocation has been beneficial relative to other investment opportunities they could have chosen instead.

Benchmarking private capital investments

Investors commonly employ three levels of benchmarks, each with different objectives: 

Policy benchmarks

Most institutional investors report performance against (1) a total policy benchmark and (2) asset class benchmarks. Total portfolio performance is reported against the total policy benchmark, while asset-class performance is reported against respective asset class benchmarks. The total portfolio benchmark is composed of asset class benchmarks, weighted by strategic asset class target allocations. 

In recent years, investors have increasingly implemented private investment asset class benchmarks in their portfolios. This is driven by the growing allocations to alternatives and an increasing ubiquity of private market performance data.  

Investors often use time-weighted returns indexes as private investment asset class benchmarks.  

From a total portfolio perspective, this enables a meaningful comparison to public market investment returns.  

Peer group benchmarks

A key challenge when creating a peer group benchmark is striking the right balance between two requirements: ensuring the funds selected are similar enough to be compared to one another and ensuring that there are sufficient funds in the group for such comparisons to be meaningful.  

A peer group should therefore include funds that have a similar vintage, investment strategy, and geographic focus.  

Additional criteria – such as industry and fund size – can also be included when creating a benchmark group. A common criteria investors search for is ‘first-quartile performance’, which filters for funds in the top 25% of its peer group. 

Building a good benchmark  

In theory, the larger the pool of performance and cashflow data, the better the benchmark. However, there are many other factors involved in creating the most reliable and accurate benchmark.

Click on the options below to explore some of the factors that make a good benchmark.

By law, public companies must file detailed, publicly accessible performance reports regularly, but private companies face no such requirement. Managers of private funds – which consist of holdings in private companies – may choose to voluntarily disclose fund-level performance to data providers such as Preqin, but they are under no obligation to do so, nor are they required to make this information publicly available.  

On the asset allocator side, some investors in private funds (LPs) are required to publicly disclose a limited amount of information about the performance of their investments. Typically, these disclosures come from large institutional investors responsible for managing assets for public pension funds. For LPs who are subject to the US Freedom of Information Act (FOIA), this reporting is mandatory. 

Since disclosing fund-level performance is voluntary on the GP side and limited on the LP side, there is potential for reporting bias in performance data. This may affect the reliability of a private capital benchmark based on such data.

From a GP perspective, a major incentive to self-report fund-level performance is when the fund does well, as that could support future fundraising efforts. Conversely, if fund performance is weak, a GP may delay reporting such information or may choose not to report it at all. If GPs pursuing a certain investment strategy delay their reporting or avoid it altogether, the result may be an incomplete or skewed picture of overall performance for that strategy.  

A benchmark built on such incomplete or skewed data may be said to suffer from survivorship bias. This occurs when the funds used to create the benchmark are tilted toward successful, high-performing funds which have “survived”, while weak or failed funds are left out since the data on these funds was never reported.