EDHEC: Listed benchmarks don’t reflect private equity returns
EDHEC: Listed benchmarks don’t reflect private equity returns
By Evan Clark, Senior Private Market Analyst, EDHEC Infrastructure & Private Assets Research Institute
In a recent Scientific Infra & Private Assets (SIPA) report entitled ‘Rethinking Benchmarks: Listed Equities Benchmarks Continue to Misrepresent Pension Fund Private Equities Performance,’ we evaluated the benchmarking choices for eight large Canadian pension plans (known as the ‘Maple 8’).
With the backdrop of poor performance of private equities, many pension plans’ private equities returns are unfortunately benchmarked to public market proxies (or, absolute return proxies) that have performed exceptionally well, positioning such plans as ‘underperformers’. As we documented in our report, the choice of benchmarks offers a poor reflection of private equities performance at these institutions. This can create confusion in the market and has generated unflattering coverage.
Canada’s Maple 8 performance
We previously wrote about the 2023 performance of eight Canadian pension plans (see here). When 2024 results became available, we updated our report to reflect performance in the most recent year. Not surprisingly, the results are like those from 2023. Lower returns (currency adjusted) that reflect the realities of the private equities market, as captured by the private2000 index.
However, 2024 benchmarks are still disconnected from the private equities market and instead capture the strength of the large cap listed equities market. We looked at 5-year data to see if it is more instructive but find it to be just as misleading as 1-year data. If you use the wrong benchmark, changing the measurement period does not help.
Towards a better benchmark
The benchmarks employed by certain institutional investors fail to capture the performance and risk attributes of the private equities market. This leads to incorrect assessments of risk-adjusted performance. The private equities market is large and mature and should be evaluated against a benchmark that reflects that underlying market.
As we stated in our prior report, pension fund leadership, trustees, and beneficiaries may not be well-informed about how their private equity portfolios are performing. We show that when using the private2000 index (see here), recent private equities performance at these eight pension plans is very much in line with or exceeding the market. Importantly, the relative performance cadence over the prior 5 years looks very different than when compared to listed equities benchmarks.
Conclusion
Much like 2023 results, 2024 returns from leading pension plans reflect the challenging conditions in the private equities market. The choice of benchmark – listed equities indices – offers little insight regarding performance. This leaves trustees, board members, and beneficiaries in the dark about how well their private equities portfolios are performing. This is the case using short-term data (1 year) or longer-term (5 year). Given the diverging performance of listed versus private equities, and the material differences between the two markets, it may be time for pension plans to adopt a more relevant benchmark.