Capitalize on your private markets allocation with the right data

Timelines are expanding, deal sizes are growing, funds are getting larger and high returns are being reaped in the private markets. Given the opaque nature of alternative asset classes, however, it can be daunting to approach this constantly growing and evolving portion of the market. Fueled by our research process, we’re always improving our data coverage and platform.

In recent years, institutional investors have been particularly drawn to the promise of higher returns and greater diversification that the private markets offer. While the obstacles posed by an ever-changing landscape can be challenging, asset allocators stand to benefit from a better understanding of how to gauge historical performance across strategies, compare track records of fund managers and use data to unearth promising opportunities.

According to a survey conducted in Q2 2019, the top three reasons why institutional investors believe the private markets have continued to pull in record numbers of capital are: higher potential returns than the public markets, diversification benefits and an increasing amount of attractive investment opportunities.

Investors can tailor their exposure to private markets based on their specific needs and risk tolerance. For example, secondaries investing can provide greater access to a wider range of geographies and strategies by design, offering somewhat mitigated risk compared to an area like traditional private equity.

At the highest level, institutional investors are held to seeing that their investment mandates are met. But sudden shifts in one asset class or another can pose a serious threat to allocators who are active in the private markets.

When public market values swiftly fall it could mean that allocations that had previously been balanced may no longer appropriately reflect an investor’s target allocation framework. This is especially true for investors who operate in the private and public markets, as relatively slower-moving, illiquid private market funds will take longer to reflect changes in the broader environment.

It’s well accepted that top-performing funds generate outsized returns, but how do you find and access top-tier firms and funds?

The private markets are continuing to grow and see increased levels of participation, despite challenges in the economy. The number of US PE-backed companies has doubled between 2007 and 2020. In that time, strategies across the asset class have also proliferated. Continuously evolving, the industry has found new ways to deploy capital and collect returns. Some firms have looked to broaden their offerings as to cover every corner of the market, while others have employed specialized approaches such as buying minority stakes in GPs, pursuing secondary buyouts or completing platform acquisitions. The rise of secondaries investing has also helped allocators achieve greater diversification and exposure to different geographies. Further, investment timelines are continuing to expand—ballooning up from the traditional 10-12 years to as long as 15+ years in some cases.

The number of private equity and venture capital fund managers has roughly doubled since 2006—a clear sign that the private markets are continuing to grow. But with so many options, how do you find the right fund manager to partner with?

Fortunately, there is now more data than ever on the private markets, helping investment professionals mitigate risk. This abundance of data enables limited partners to find the right firms to work with, invest smarter and ensure their capital is safe.

Despite being a fundamental component in an LP/GP relationship, there aren’t really hard and fast rules for structuring limited partnership agreements (outside of the ILPA’s guidelines). There are, however, a lot of variables to consider—all of which could be assigned different levels of significance based on your goals. Obviously, the details matter, but more importantly, the LPA is a key component in what will be a 10+ year relationship. In this section, we discuss some ways to align incentives between your firm and a fund manager, as well as strengths and weaknesses of different fee types and carry structures.

The lack of a uniform methodology for gauging private market performance has led to inconsistent approaches across the industry and difficulties in really seeing how well individual funds and investment strategies have fared. Without a shared methodology, it can be challenging to make true apples-to-apples comparisons. Still, there are ways to present more appropriate comparisons when it comes to fund performance by using custom benchmarks.

From tracking fund managers to making investments, you need a full view into the private markets to fulfill your fiduciary duty. PitchBook tracks the entire landscape of private capital—from limited partners and commitments down to GPs, funds, investments, companies and individuals—all in one place. Our information can help you get ahead of top-performing funds before they come to market, select the best fund managers and better serve your stakeholders.

Capitalize on your private markets allocation with the right data

The guide will help you learn how to:

• Identify top-performing funds
• Conduct macro analysis
• Understand fund timelines for varying strategies
• Track and evaluate fund managers
• Structure your limited partnership agreement
• Validate your allocation strategy