Benchmarking the Performance of Private Equity Portfolios of the World’s Largest Institutional Investors: A View from CEM Benchmarking

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 underperforms the benchmark, indicating that the returns for private equity are comparable to those of listed equity.

TOPICS: Private equity, performance measurement, equity portfolio management, statistical methods, style investing, pension funds

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 underperforms this simple investible benchmark. The average net value added from 1996–2018 is −0.67%.

• • Costs strongly affect relative performance; low-cost internal direct or co-investment private equity outperforms high-cost fund-of-funds private equity.