Research Insights

Benchmarking the Performance of Private Equity Portfolios of the World’s Largest Institutional Investors: A View from CEM

Alexander Beath and Christopher Flynn

December 2020

This original CEM research was published in the December 2020 edition of the Journal of Investing. To get a copy of the article’s reprint, just click the download button below.

ABSTRACT

The CEM database contains private equity true-time weighted portfolio returns net of investment costs, along with self-reported benchmark returns for some of the largest institutional investors in the world. To quantify performance, the article uses a consistent benchmarking methodology, employing geographic blends of small-cap equity indexes and showing that the method yields a better benchmark. From 1996-2018, private equity slightly underperformed the benchmarks, indicating that the returns for private equity are comparable to those of listed equity.

KEY FINDINGS

Of the private equity benchmarks currently used by investors, most are flawed. A benchmarking method using listed small-cap equity, with a lag of between three and five months, is sufficient to benchmark most private equity portfolios.

The average private equity portfolio historically underperformed this simple investible benchmark. The average net value added from 1996-2018 is -0.67%

Cost strongly affects relative performance; low-cost internal direct or co-investment private equity outperforms high-costs fund-of-funds private equity.

TOPICS

Private equity, performance measurement, equity portfolio management, style investing, statistical methods, pension funds*

“© 2021 PMR. All rights reserved.”