How to Benchmark Private Capital... and How Not to
New Paper By Burgiss Research
Private capital benchmarks are used for a variety of purposes, including targeting a return, comparing investments to public market benchmarks, evaluating the quality of decision-making, and providing data for compensation.
Over the last year, we’ve been taking a hard look at private capital benchmarks. In our recorded webinar, “Constructing a Benchmark: The Good, the Ugly, and the Bad,” Luis O’Shea, Head of Applied Research at Burgiss, explored some of the pitfalls of common practices and hinted at some resolution of common concerns.
The not-so-simple question benchmarks help to answer is: “How do you determine whether your private capital portfolio has under- or over-performed?” In stark contrast to listed equities, there isn’t consensus on how to build a private capital benchmark.
In this paper we advance the discussion and describe a recommended approach for constructing a composite private capital benchmark, emphasizing the importance of pooled measures. In it, we also propose a methodology for computing portfolio ranks, which allows the generation of a report containing both pooled and rank measures at all levels of a reporting hierarchy.
A second important goal of this paper is to illustrate the possible downsides to using benchmark methodologies different from the one we propose.