Synthetic Peer Benchmarking for Diversified Private Equity Programs

At BlackRock Private Equity Partners we believe that continued innovation of our tools and analytics is imperative in achieving superior risk-adjusted returns and delivering a distinguished and more transparent experience to our investors.     

As a private equity solution provider, most of our investors are invested in a collection or diversified program of private equity investments to minimize idiosyncratic or unsystematic risk and thereby achieve optimized risk-adjusted returns. However, in implementing a diversified program of private equity fund investments, a number of thorny measurement issues arise, not least of which is how to do appropriate benchmarking. Apart from the public market equivalent (PME) method, an investor will ask how similar diversified private equity programs have performed during the same time window. In order to answer this question, detailed performance information for a large universe of diversified programs would need to be available, which is currently not the case.    

Recently we published a paper devoted to a new technique that answers that question and allows for representative peer benchmarking of diversified private equity programs. More specifically, we list below the common pitfalls in standard benchmarking methods and how our synthetic peer benchmarking (SPB) technique addresses these pitfalls:       

  • Lack of comparable and representative data
    Our SPB technique simulates a diversified program by mimicking its exact composition, leveraging private equity industry data and additionally providing probabilistic outcomes for multiple and internal rate of return
  • Misleading practice of averaging underlying performances of individual funds
    With SPB, we reconstruct underlying cash flows, aggregate to a program level and then calculate performance – by doing so we properly address a mathematical pitfall    
  • No visibility on the drivers of out- (or under-)performance
    The SPB technique analyses overall return and attributes it to a market factor, a vintage, strategy and geographic adjustment and an unexplained factor which, among others, may be interpreted as manager value-add

Thus, as a direct application, this technique enables peer benchmarking of diversified programs implemented by BlackRock Private Equity Partners as well as by other solution providers.

In the article we outline the technique and discuss in detail the results for two example diversified private equity programs. We would be delighted to discuss this technique further with you and answer any questions you might have in relation to this.   

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