The PitchBook Private Capital Return Barometers are a suite of models that assess the current return environment for US private market funds.
How are the barometers calculated?
Our frameworks generate a Barometer Score that we recalibrate to a 0 to 100 scale, where 50 represents a neutral expectation of average returns for the selected asset class. These scores allow us to compare the relative market conditions across fund strategies and time. Additionally, the barometers produce a real-time estimate, or “nowcast,” of quarterly fund returns, which is available three months earlier than our preliminary returns provided in PitchBook Benchmarks Reports.
The indicators used in our methodology fall into six categories: macroeconomic, equity, credit/rates, venture capital, infrastructure, and commodities. For detailed methodology, please click here. A glossary of terms is provided at the bottom of this page.
What are the use cases for the barometers?
• Providing insight into the economic and market exposures in aggregate fund strategy returns.
• Nowcasting returns on a monthly basis to provide more real-time readings before quarterly returns are available.
• Identifying periods where reported returns deviate from fundamental expectations.
Two versions of the nowcast are available, each corresponding to the return series provided in the below dropdown selector. The first version, “Reported,” reflects the barometer-implied return expectation based on the reported return series. The second version, “Desmoothed,” shows the barometer-implied return expectation based on the desmoothed return series.
Why are there two return series to choose from?
Private market investments are priced infrequently (usually quarterly) and are often based on unaudited estimates of what the investment might sell for in an arm’s-length transaction. This approach introduces bias in the reported fund net asset values (NAVs), leading to understated volatility and correlation and resulting in “smoothed” returns. To correct for this bias, we adjust the reported return series by estimating and adding back the missing volatility, producing a desmoothed return series that more accurately reflects the true economic reality. (For more information on smoothing of private market returns, please see our previous research.)
Below, we have charted the PitchBook Private Capital Indexes with the latest nowcast estimates appended, as well as the current nowcast readings across different asset classes.
The table provides detailed data on how each financial market and macroeconomic indicator contributes to the overall Barometer Score, offering insights into the key drivers of the model’s output. Indicators with the highest absolute Beta values have the greatest impact on the Barometer Score. The “Value” field shows the Z-score for each feature relative to historical data, indicating how many standard deviations the observation is from the mean.
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Terms
· Reported returns: These are pooled quarterly returns captured by PitchBook by aggregating all active constituent funds’ NAVs and cash flows in the respective index series. Reported returns are primarily sourced from individual LPs invested in the private capital funds. These returns are net of fees and carry.
· Desmoothed returns: These are adjusted quarterly returns designed to correct the artificially low volatility in reported returns. By accounting for the influence of both current and prior market conditions, desmoothed returns reintroduce the estimated missing volatility of reported returns. This adjustment transforms the reported returns to better reflect the economic fluctuations of private assets.
· Barometer Score: The output from our models used to compare return conditions across fund strategies and time. A score of 50 represents an expectation of average returns for the fund strategy. Scores of 25 or lower are considered negative, while scores of 75 or higher are considered positive. Scores between 25 and 75 are considered neutral. The Barometer Score is derived from a Z-score of the desmoothed nowcast, which is adjusted to a 0-100 scale using winsorized minimum-maximum normalization. In this process, Z-scores below -1.5 are adjusted to 0, and those above +1.5 are adjusted to 100.
· Nowcast: The nowcast is an estimate of fund returns produced by the PitchBook Private Capital Return Barometers, utilizing reported returns. It reflects the expected returns that will be reported once the data becomes available.
· Desmoothed nowcast: The desmoothed nowcast is an estimate of current fund returns produced by the PitchBook Private Capital Return Barometers, utilizing desmoothed returns. It reflects the expected returns as if the assets were priced without the smoothing bias.
· Z-score: Also known as the standardized score, a Z-score measures how many standard deviations a data point is from the mean of the dataset. A Z-score of 0 indicates the value is exactly at the mean. Positive Z-scores indicate values above the mean, while negative Z-scores indicate values below the mean. For example, a Z-score of +0.8 indicates the data point is 0.8 standard deviations above the mean.
· Beta (table column): The indicator’s coefficient used in the Barometer’s linear regression. The Barometer Score is most sensitive to indicators with the highest absolute Beta values.
· Value (table column): The Z-score for the indicator relative to historical values.
· Contribution (table column): This represents the product of the Beta and Value columns. The total of the Contribution column is the Barometer Z-score. Indicators with the highest absolute Contribution values have the most significant impact on the Barometer Score.