Which Private Equity Benchmarks Should Your Firm Adopt?

Compared to measuring public market investments, private equity benchmarks for fund performance are an entirely different animal.

As a relatively new asset class with irregular cash flows, private equity funds require a different way of thinking than other asset classes.

Over the past decade, Limited Partners (LPs) have been using public market-equivalent (PME) benchmarks to measure fund performance. While PMEs are more complex to calculate, they do offer methodological benefits.

Still, many firms prefer to leverage their own measurement techniques, often based on comparing Internal Rate of Returns (IRRs) to stock indexes.

In any event, a good benchmark should be applicable, understandable, and reflective of the underlying portfolio. A critical part of managing risk, benchmarks help firms evaluate past investments, understand the overall picture, and ultimately, make informed decisions. In order to stay relevant—and stay ahead of your competitors—General Partners (GPs) must have the ability to report on fund performance with metrics that LPs can easily compare to industry benchmarks in order to choose the fund manager that’s best for them.

Crucial Components of Private Equity Benchmarks

Assessing private equity performance can be a complex task. While benchmarks should reflect the fundamental characteristics a firm believes will make a good investment, the types of benchmarks often vary from LP to LP. As a result, LPs can use their benchmark choices to differentiate their firm from competitors.

Of course, before deciding whether or not to invest, firms need to fully understand what they’re measuring against their chosen benchmarks. They need to know:

  • Is the investment liquid or illiquid, private or other asset?
  • What’s the performance over time?
  • What’s the opportunity cost of investments?

Generally driven by mandates like non-U.S. funds under $1B versus broad global PE portfolio, private equity benchmarks can be broken down into four main types based on their function:

  • Compare a fund or portfolio to the industry
  • Compare a fund or portfolio to the public markets
  • Compare the industry to the public markets
  • Compare a fund or portfolio to the public markets and compare that to how well the private equity industry did relative to the public markets

Finally, when you establish a robust benchmark to evaluate the performance of an actively managed portfolio, consider to what extent multiple measurements will allow for a more holistic view. Are you capturing quantitative and qualitative measures over both short- and long-term periods? This is the kind of data that will help your firm have the big-picture view necessary to make informed investment decisions.

Technology Streamlines the Benchmark Process

Today’s data analytics solutions can help your firm eliminate unnecessary risk by ensuring your team is always working from a single source of truth. Not only can you increase the transparency and accuracy of the data you collect, your firm can also gain critical backend efficiencies when you choose a solution designed specifically for private equity.

Altvia Answers, for example, helps firms connect data from disparate sources and easily gather meaningful information they can use to create more powerful private equity benchmarks. With a central repository for all of your firm’s data—and analytics you can obtain without IT assistance—your firm can also quickly access the information investors request and need in order to make good decisions.

Adopting tools designed for private equity can help your firm provide a fully transparent experience that builds trust with stakeholders and investors, and that empowers you to stand out from the competition.

Global Private Equity Benchmark Considerations

Today, many private equity firms use U.S. benchmarks like the S&P 500., However, some firms are beginning to recommend switching to a more global or blended benchmark system. If this trend takes hold, expect a slow progression, as changing a benchmark is a complex process requiring the approval of a firm’s board.

For now, investors should take care to understand what’s being measured, how it’s being measured, and what is being used to benchmark returns.

LP Experience

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

private equity benchmarks