With private equity going mainstream, financial advisors face a challenge: how to measure and evaluate performance in an asset class where the numbers don't always line up. Though private equity benchmarks currently exist, their posted performance varies widely, making it difficult to understand how portfolios stack up.
Frustrating? Absolutely, but opacity has historically been accepted as a characteristic of this asset class.
For advisors responsible for explaining risk and results to clients, lack of transparency isn't merely frustrating, it can be a fiduciary liability. It can also undermine client confidence and make it harder to assess whether private equity exposure is delivering value to a portfolio.
Not all benchmarks are designed to answer the same questions, and returns can mask important differences. Before allocating client assets based on assumptions from private equity benchmarks with data that is nebulous at best, advisors should ask themselves three questions about the tools they're using to judge performance.
1. Is the benchmark based on fund-level reports or the actual performance of the underlying investments?
This is the most important technical distinction a private equity benchmark can have in terms of data quality.
Unlike public market benchmarks, private equity benchmarks are built in two very different ways: either from aggregated fund‑level reports or from the performance of the underlying private companies those funds invest in. Several firms now offer fund- or investment-level benchmark approaches.
Fund-level benchmarks offer a high-level view. Although they can be useful for evaluating manager selection, they provide little insight into what's driving returns — or the health of the underlying investments within those funds. For advisors discussing risk and outcomes with clients, this lack of visibility can be a problem.
Benchmarks built from underlying investment-level data can offer additional transparency, showing how specific investments, sectors, industries or regions contribute to performance. This approach mirrors how benchmarks in the public market are constructed, making private equity results easier to interpret, compare and explain.
2. Does the benchmark track the type of fund I'm investing in?
This is critical. Many advisors use evergreen funds to invest in private equity on behalf of their clients. Unlike traditional closed-end private equity funds, evergreen funds allow for periodic entrances and exits and continuously reinvest capital as portfolio companies are bought and sold. These features can make private markets more accessible and easier to integrate into client portfolios.
Traditional private equity benchmarks, which are designed for closed-end funds with fixed start and end dates, may not provide a full perspective for evergreen fund investors. Because evergreen funds are continuously invested, their performance is often better understood using benchmarks that reflect how private companies are performing over time.
Advisors should ensure the benchmark methodology aligns with the structure of the vehicle in question. In some cases, benchmarks built from underlying investment-level data may better reflect this reality, providing more accurate apples-to-apples comparisons of results. This allows for more straightforward performance evaluation, which helps advisors have clearer conversations with clients.
3. How does private equity performance compare to public market equivalents?
When looking at investments, clients want to understand how private equity fits alongside public stocks, bonds and other assets in their portfolio — and whether the additional complexity and illiquidity are worthwhile.
Investment-level benchmarks can allow advisors and their clients to make more direct comparisons between private and public market performance — for example, how have private health care investments performed relative to public health care stocks? Sector- and industry-level returns also help advisors get a clearer picture of whether a private equity manager's alpha is repeatable or the result of a rising tide lifting all boats.
The goal of investment-level benchmarking is to bring greater discipline to private markets investing, so advisors and their clients can rely on data — not intuition — to decide whether private equity offers an advantage over public market opportunities.
This is a net positive for financial advisors, who need to be able to assess and understand the benchmarks they're using for their clients' private equity portfolios, or risk losing the most critical asset they have: client trust.
