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*