There are hundreds of private market indexes to benchmark the performance of private assets, from venture capital to real estate to private credit and infrastructure.MadamLead/iStockPhoto / Getty Images
As more advisors consider private market funds for clients’ portfolios, data providers are offering new ways to benchmark the performance of these alternative assets. However, matching the transparency of public market indexes is still a ways off.
There are hundreds of private market indexes that track private assets, from venture capital to real estate to private credit and infrastructure.
“It’s a huge growth area for MSCI and a lot of that is because we’re seeing high demand for the ability to understand how these assets perform collectively,” says Courtney Scharff, MSCI Inc.’s executive director and head of private capital indexes and taxonomies in New York.
MSCI offers more than 500 private market indexes, including ones for Canada, such as the MSCI/REALPAC Canada Quarterly Property Fund Index.
She points to growing demand from wealth advisors as more of them include private market investments in high-net-worth client portfolios. Demand for specific indexes ebbs and flows, with MSCI catering to those trends.
The top three in-demand areas for indexing from subscribing Canadian advisors are private equity, credit and infrastructure, she says.
But MSCI can “slice and dice Canada into almost every segment” upon request – tailor-made benchmarking for a specific vintage of Canadian private equity, for example.
The indexes are welcome tools for insight into an often opaque asset class, says Spencer Clark, head of private markets and thematic investments at Richter Family Office in Montreal.
“We often want to look at the track record of a GP’s [general partner’s] past vintages and then compare those against the peer group,” he says, noting Richter uses Bloomberg LP and PitchBook Data Inc.’s indexing services.
‘Imperfect tools’
Despite their utility, private market indexes have limitations.
“Private market benchmarks are useful, but they’re also imperfect tools,” says Victor Kuntzevitsky, portfolio manager with Stonehaven Private Counsel at Wellington-Altus Private Counsel Inc. in Aurora, Ont.
“Advisors need to really understand what they’re measuring and whether the benchmarks actually reflect the risks taken by investing in the asset class.”
One challenge with trying to provide transparency to an asset class that’s opaque by nature is that performance data is reported less frequently – at best, monthly, though typically quarterly, creating a lag.
The less-frequent pricing data can suggest lower volatility, so investors may assume there’s less risk, Mr. Kuntzevitsky says, “which is not accurate.”
Another issue is whether indexes capture the market they track accurately.
At MSCI, benchmarks are created based on the net asset value of participating funds, with each constituent capped at 15 per cent of an index’s value.
Yet, the indexes are more of a snapshot of a private market than a complete aggregate price like a public equity index, Ms. Scharff says, because it’s “almost impossible to capture 100 per cent of a private market.”
Capturing 40 per cent of funds in a particular private market is considered a good index that reflects typical performance, she says. The minimum threshold for MSCI to create an index is 10 per cent of funds in a particular private market space.
In Canada, MSCI’s coverage ratio is about 60 to 70 per cent, she says, noting Canadian GPs are more open to sharing performance than those in other jurisdictions.
Another drawback is that investors can’t drill down into the holdings of a private market index to see how each one is weighted and they can’t see the names of the funds included.
“Most of those GPs don’t want that, if I’m quite honest,” Ms. Scharff says, noting that including fund names and percentage allocations is the “next evolution” in the space, crucial to improving these indexes’ utility for investors.
Even the sheer diversity of indexes from different providers, each with slightly different methodologies, presents challenges, Mr. Clark says. “We’re in a messy phase of trying to figure out what [a good private market index] ultimately is.”
And these services are “not cheap, so you’ve got to pick your spot,” he adds.
Many advisors also use public market equivalents (PMEs) as performance proxies, Mr. Kuntzevitsky says.
“When considering an evergreen private equity manager, for example, the benchmark I might use is a global public equity index plus an illiquidity premium,” he says.
Although useful to measure “opportunity cost,” PMEs are not “true apples-to-apples comparisons,” Ms. Scharff says.
Still, she acknowledges private market indexes’ shortcomings. Among those is a self-reporting bias, whereby GPs with strong fund performance are more likely to report performance versus those whose funds underperform.
“If you measure only the winners, it can overstate what the returns truly are for that type of fund,” Mr. Kuntzevitsky says.
Yet, as more advisors include private markets in portfolios, Mr. Clark expects indexes to improve, providing better insights into performance.
“The hope is they’ll keep getting better and more transparent because what you’re getting right now is really aggregated performance numbers – which have utility, but it would be even better to see the constituent data behind those numbers.”