Benchmarking issues can lead to “insufficiently conservative estimates”, according to Bfinance – but “overly conservative assumptions” can also lead to investors not allocating enough to private markets.
While it is not necessarily a new problem, the consultancy group highlighted that recent increased interest in asset classes such as private equity had exacerbated the issue.
Changes within private markets – such as a move away from using leverage and the rapid growth in assets under management – have also presented problems to researchers when trying to analyse past performance, Bfinance said.
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The company argued in its report that “it is more important than ever to validate how private markets are incorporated within asset allocation” and to ensure adequate governance.
Benchmarking issues can lead to “insufficiently conservative estimates”, Bfinance said – but “overly conservative assumptions” can also lead to investors not allocating enough to private markets.
The report analysed different approaches to calculating a ‘premium’ offered by private equity over listed equity, including academic studies and research by asset managers.
The Bfinance researchers estimated from this analysis that private equity buyout strategies generate an average premium of 2% over listed equities over 10 years, net of fees, while venture capital strategies offered a 3% premium.
While these figures were lower than equivalent estimates from some asset managers, Bfinance argued that they still showed that pension funds should be allocating a “meaningful” proportion of their portfolios to private markets.
“This shift challenges the assumption that private market investments will consistently outperform public markets and raises questions about appropriate risk-adjusted returns,” Bfinance said.
The consultancy’s most recent Global Asset Owner Survey found that 42% of institutional investors thought that the illiquidity premium in private markets would be smaller for the period 2020 to 2040 than it was for the previous 20-year period. Almost half (47%) felt that the long-term illiquidity premium was likely to be in the region of 2% to 4%.
Ruben Mutsaers, senior director of portfolio solutions at Bfinance, said: “Private markets are evolving fast, and investors must rethink allocation, risk, and governance. The days of assuming private equity will consistently deliver superior returns are over.
“There is a need for more robust modelling, realistic return expectations, and strong oversight to ensure private market investments remain a valuable component of institutional portfolios.
“By refining benchmarks and integrating a public-plus-premium approach, investors can make more informed decisions in an increasingly complex landscape.”
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Despite this uncertainty, private markets were still a “vital component of institutional portfolios”, Bfinance said in its report.
Slower fundraising and high valuations “may improve investor terms”, the report added, while “active oversight and disciplined decision-making will be key to long-term success”.
In a separate global report, private markets specialist manager Adams Street Partners found that two thirds (67%) of investors planned to increase commitments to their existing private markets managers. Just over half (54%) planned to add new managers.
At the same time, 40% said they were seeking to sell assets in the secondary market and 26% said they were reducing commitments to existing managers.
