In part 1, I addressed the question of which PME method to use. In this piece, I will discuss “best practices” for choosing an index. This is undoubtedly a question that will be asked by sophisticated LPs. A GP’s answer will reveal how knowledgeable and in tune they are when it comes to LP concerns. When an LP is running a PME analysis against a GP’s net performance they are evaluating the opportunity cost of allocating money to private equity versus public equity.
To learn more about LP preferences, we surveyed 150 of the largest public pension funds in the United States to find out what they use as their private equity benchmark. Eighty-six disclosed their benchmark and we plotted the responses that show up more than once below.
More than two-thirds (59) use a public market index as their private equity benchmark and 70% of those LPs (43) use a broad public market index. The most popular index is the Russell 3000, which tracks the performance of the 3000 largest publicly listed companies in the United States.
In the last piece, I will address how to think about PME in the context of fund performance and how LPs are using it.