A benchmark fund is a measurement of performance. It is a basis to compare. In the private market benchmarking research is an opportunity to allow limited partners (LPs) as well as general partners (GPs) to evaluate the performance of specific funds as well as evaluate the performance of broader benchmarks across different asset classes. However, unlike public markets, which have widely utilized indexes that cover different segments of the market including such as the S&P 500 and Dow Jones Industrial Average, the private markets do not have no one “standard” measure to assess benchmarks in the financial sector.
Lack of a consistent method for benchmarking data has resulted in different approaches across the market and problems in understanding the extent to which investments and funds have been performing. and the consequences of not assessing what the private market fund’s performance is can be serious. Unreliable benchmarks for funds can cause limited partners to overlook investment opportunities and make unwise allocation choices. In general partnerships, insufficient benchmark data makes fundraising much more difficult.
These factors provide an opportunity to develop more appropriate, customized benchmarks that will help informing decision-making.
The issue with benchmarks that are third-party
A majority of benchmark data from third parties lacks the transparency required to determine how individual funds or investment plans have been performing. They do not reveal the actual fund information they comprise as well as the investments these funds have made, or even the performance of the individual funds, which means crucial information that can be used to better assess performance are missing.
Making custom financial benchmarks using PitchBook
“Custom” Benchmarks feature was created to assist you in reducing the risk of creating Private Capital financial benchmarks by providing you with the possibility of easily tailoring the benchmarks to specific benchmarks, strategies, or geographic locations, allowing you to better evaluate the performance of different fund benchmarks and different investors.
Here’s how it works.
Create market-specific funds benchmarks
You can quickly identify the most suitable fund for your benchmark by using the intuitive search criteria, which include:
- Vintage year
- The size of the fund
- Type of fund
- Fund location
You can also include or eliminate the individual funds in your benchmark data, allowing you to modify it further. You can also pool funds from older years to look at macro data patterns over the most relevant benchmark fund and investor.
Display the info quickly to understand patterns and differences in the performance of funds.
- Internal rate of returns (IRR)
- Total value to be paid-in (TVPI)
- Distributions to the paid-in (DPI)
- Resting value to be paid-in (RVPI)
After that, you can save your visualizations of data as a PNG image Export your data into Excel and then share the personal benchmark with your colleagues in your account via the Collaborative Lists feature on PitchBook..
Find the fund information for every benchmark
After you’ve created your personal financial benchmark, you’ll access the data on returns of the individual funds in it. You can also view data on the fund’s investments as well as liquidity events. It’s easy to determine how a particular fund is earning returns. It’s as easy to move outliers out to remove them from the listing.
Additional tools for benchmarking are available taken from PitchBook
Fund comparison is simpler than ever before thanks to the Benchmarked Funds offered by PitchBook. A part of Custom Benchmarks this service lets users visualise the performance of individual benchmark funds , by comparison with up to 10 funds for an analysis of relative performance.
Based on a fund’s perspective with respect to its peers as well as the benchmark — essential information for LP asset allocation as well as GP fundraising.
Fund terms and fees and fees
Additionally, as included in PitchBook’s PitchBook Benchmarks feature Fund Terms & Fees provides two key functions: First it provides PitchBook users the ability of displaying six funds terms and fee metrics. These include the management fee carrying, investment terms, funds term hurdle rate , and the commitment to GP. In addition, it gives users the capability to display another index.
To LPs and GPs the Fund Terms and Fees offer the additional benefit of clarity and flexibility in reviewing fund managers and performing market analyses. LPs are able to use this function to assess the fee structures that currently apply to funds as well as GPs to get an understanding of how their fees are compared with their peers.
Custom fund benchmarking FAQ
Why is the custom financial benchmarking of your choice matter?
Private market funds work different from virtually any other strategy for investment. They’re closed-end investments, therefore many of the conventional public market benchmarks that people utilize, whether for broad equities such as a mutual fund, the hedge fund. A lot of private capital benchmarks are unsuitable because they’re made up of basic characteristics like vintage year, type of fund (PE or VC, for instance. ) the size of the fund and the location of the highest-level. They are typically too broad to allow for a meaningful comparison.
Despite these flaws, GPs and LPs typically invest a lot working to ensure that standard benchmarks from third parties fit for the specific benchmarks they’re looking for.
The pre-made benchmarks serve functions, but they also provide a general view of the way an investment approach performs with no need to conduct extensive benchmarking. However, when these benchmarks are used to establish comparisons between particular funds and strategies for fund management, they frequently require LPs as well as GPs make their decisions using benchmarks that are not complete, a risk that could be reduced should they be able to design custom benchmarks of their own.
What’s the advantages from benchmarking?
Transparency is the key word. Investors must have a better understanding of benchmark data to decide whether it’s appropriate for their purpose or if a different method is required for the right comparison. Many third-party service providers don’t reveal the funds that the benchmarks they use are the investments these funds have made, or the performance of the individual funds.
This lack of transparency may cause important questions to remain unanswered. For example, do the fund of comparison invested in exactly the same type of firms? Perhaps even the same industries? At the end of the day financial benchmarks with no transparency can lead to the loss of crucial information that could be used to assess the performance of the company.
What is the most appropriate benchmark for an individual benchmark for funds?
In addition to the standard details that third-party benchmarks for private markets offer on the funds, their size, type and geographic location, you might also consider making better comparisons by looking at:
- Portfolio construction
- Investment mandates
- Focus on industry and/or specific sectors
- More specific definitions of the size of funds and their place of operation
Each of these aspects are beneficial for gaining an accurate picture of the fund’s performance, which eventually leads to better decision-making about investments.