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PitchBook Analyst Note: Return Smoothing in Private Markets

Q2 2020

PitchBook Analyst Note: Return Smoothing in Private Markets

June 3, 2021

PitchBook Analyst Note: Return Smoothing in Private Markets
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Estimating the true volatility of private market returns

When investors take stakes in public companies, tracking returns is a straightforward exercise. But the opaque nature of the private markets makes it much harder for institutional investors to accurately track how their investments have performed. 

In the analyst note “Return Smoothing in the Private Markets,” PitchBook’s Andrew Akers breaks down how the uneven presentation of private market returns has impacted allocators.

Key takeaways
 
  • Unaudited accounting practices and the tendency to underestimate valuations have led to lower volatility metrics within the private markets.
 
  • A return “desmoothing” formula coined by MIT professor David Geltner can give institutional investors a better sense for volatility and the level of diversification within a portfolio.
 
  • Artificially smoothed returns can impact asset allocation modeling investors have relied on for years.