The New Way to Benchmark Private Equity

by goksor

Let us assume for a minute that performance persistence in private equity and venture capital is real.  This begs the question: how do I measure performance and how do I pick winners?

Most investors use Net Multiple and Net IRR as performance measures.  The combination of Multiple and IRR helps control for the assumed performance persistence and timing dependency of IRR.  Recently, Net DPI has emerged as an additional indicator of performance, as we discussed in last week’s blog.  Investors like that DPI quantifies actual returns rather than anticipated returns as indicated by Multiple and IRR.

With fund performance numbers in hand, benchmarking is the default answer for finding future winners in the market.  Investors use peer benchmarking in an asset class to understand relative performance.  For this to work, benchmarking datasets need to cover a representative set of funds for a given time period, market focus, and geographic exposure.  Unfortunately, most benchmark providers offer only aggregated benchmarks, making it hard to validate relevancy of fund peers.

More importantly, while peer benchmarks are relative, investor portfolio returns are absolute.  We rarely talk about this insight in the private equity and venture capital industry.  To be clear, a first quartile private equity fund can be the worst performer in a multi-asset portfolio or vice versa.  This has led investors to look to Public Market Equivalence (PME) benchmarking as a way to quantify public returns relative private fund returns.

PME benchmarking is, however, perceived as time consuming and complicated.  It does not help that there are a number of different PME methodologies.  Until now, PME has been reserved for large institutional investors or service providers that have big head count or the budget to buy expensive software for $50,000 per year.

Today, Bison is reinventing performance benchmarking.  We are releasing three products in one: a cashflow reader for calculating performance metrics, an advanced benchmarking tool that shows you each underlying fund and reporting entity, and a revolutionary PME tool that combines multiple methods and indexes.  It’s the Performance Calculator by Bison.

The Performance Calculator makes advanced benchmarking available to everyone, lowering the barrier to entry to invest in private funds.  It helps users explore both relative to returns for private equity and venture capital funds and actual performance relative other assets classes.  The calculator also saves time compared to existing processes and products.  Bison can read standard excel cashflows, host S&P 500 total returns index data, and incorporates three leading methodologies for PME calculations (Long Nickels, Kaplan Schoar, and Direct Alpha).

We are introducing the Performance Calculator at $499 per month, including unlimited seats and concierge service.  Try it free for a limited time on Bison.  Click here to get started.

Bison delivers advanced software for analyzing, benchmarking, and monitoring private equity and venture capital funds.  We aggregate and normalize millions of data points on firms, funds and managers and offer software tools for making sense of it all.  Bison empowers users to act on the best information.