Private Market Returns: The Hidden Dangers of Bad Benchmarking

What's New:

PitchBook's recent benchmarking institutional research report reveals a crisis in private market performance evaluation, where traditional benchmarking approaches are failing to capture true investment success, potentially misleading billions in allocation decisions across private equity, venture capital, and private credit portfolios.

Why It Matters:

As private markets become increasingly accessible to a broader investor base, misaligned benchmarking practices could lead to poor investment decisions, inappropriate fund manager selections, and significant capital misallocation in the $10T+ private markets ecosystem.

Big Picture Drivers:

• Complexity: Private market investments require unique evaluation methods that differ fundamentally from public market metrics

• Democratization: New retail and institutional investors lack expertise in private market performance measurement

• Timeline: Traditional quarterly or annual evaluation periods clash with 10+ year private investment horizons

• Transparency: Fund managers may inflate unrealized valuations during fundraising periods

• Accountability: Recent cases like Alberta Investment Management show serious consequences of poor performance evaluation

By The Numbers:

• 2-3 years: Typical timeframe when managers seek new capital

• 10+ years: Required timeline for true private fund performance evaluation

• 0% correlation between early fund performance and final returns

• 20-30% difference between gross and net returns in private markets

Key Trends to Watch:

• Private market benchmarks are evolving to incorporate vintage year comparisons

• Fund managers face increasing pressure to justify performance claims during fundraising

• Limited partners are developing more sophisticated evaluation frameworks for partial realizations

• Traditional performance metrics are being supplemented with custom peer group analyses

The Wrap: Success in private market investing requires a complete overhaul of traditional benchmarking approaches, focusing on appropriate time horizons, peer comparisons, and decision-specific metrics while maintaining consistency across evaluation periods.