In 2023, US private equity (PE) performed better than venture capital (VC), but returns for both asset classes trailed those of the public markets, which rebounded strongly from a tough 2022. For calendar year 2023, the Cambridge Associates LLC US Private Equity Index® returned 9.3% and the Cambridge Associates LLC US Venture Capital Index® returned -3.4%. Information technology (IT) continued to be the largest sector in PE and VC and produced divergent results across buyouts and growth equity (the components of the PE benchmark) and venture capital. Tech buyouts, which are generally mature companies, performed the best and growth equity–backed technology companies earned better returns than those in the VC index. Figure 1 depicts performance for the private asset classes compared to the public markets. ¹

Calendar Year 2023 Highlights

• Despite posting lower short-term results (six months and one year) than the public markets as of December 31, 2023, the US PE index outperformed relevant public indexes in every period longer than three years. The US VC benchmark’s performance relative to public indexes has been more mixed, in part due to its lackluster returns since 2021.
• After spiking during the COVID-19 pandemic era, exposures to public companies in the PE/VC indexes have fallen. At the end of 2023, public companies accounted for a modestly higher percentage of the market value of the VC index’s market value than of the PE one (roughly 8% and 7%, respectively). At the same time, non-US companies represented about 20% of PE and 13% of VC.

US Private Equity Performance Insights

In 2023, a macro environment marked by stubbornly high interest rates, geopolitical tensions, and a concentrated but strong rebound in the public market proved to be challenging for PE fundraising, investment activity, and exits. PE portfolio company valuations, which tend to move directionally with the those of public companies, neither fell dramatically in 2022 nor rose massively in 2023 and in both years, were more resilient in buyouts than in growth equity. Limited partner (LP) cash flows were down again in 2023 as market uncertainty and a large bid-ask spread constrained buying and selling, leading to fewer capital calls and distributions. As of the end of 2023, four vintages (2018–21) accounted for nearly 60% of the PE index’s value, which is not surprising, given the abundant fundraising in that era. All four vintages earned at least 9.6% for the year.

According to Dealogic, in 2023, seven US PE-backed companies went public, and they were valued at $19 billion; the number of initial public offerings (IPOs) was up from 2022 (two), but the overall value was down about $3 billion. Among the seven, two were IT-related businesses, two were consumer companies, and there was one each in energy, financials, and healthcare. The number of PE-backed merger & acquisition (M&A) transactions trailed the total completed in 2022 (1,060 versus 1,150), marking the second consecutive drop in M&A exits. Only 17% (or 180 deals) had publicly disclosed valuations and based on the data available, the average transaction size among those deals was $1.2 billion, about $90 million less than the average in 2022. During 2023, there was not much variation in the number of deals by quarter, but the total and average deal values were by far the lowest in the fourth quarter.

Vintage Years

As of December 2023, eight vintage years (2015–22) were meaningfully sized—representing at least 5% of the benchmark’s value—and, combined, accounted for 86% of the index’s value. Calendar-year returns among the key vintages ranged from 1.8% for 2015 to 13.5% for 2022; the 2015 and 2022 vintages represented 6% of the index’s value at year’s end, placing them at the small end of the largest vintages. The two largest vintages, 2019 and 2021, returned 9.6% and 11.7%, respectively (Figure 2).

Part of the divergence of returns across the vintage years was related to the performance of the fund strategies within the PE universe—buyouts and growth equity—which do not share the same return profiles. In 2023, for instance, the benchmark for US buyout funds earned 10.4%, while the US growth equity index posted a 6.1% return. Similarly, for all large vintages except for 2015 and 2016, buyouts meaningfully outperformed growth equity. Additionally, the younger vintages (2018–22) generally earned higher returns than more mature ones (2015–17).

Write-ups in industrials and to a lesser extent IT boosted returns for the top-performing vintage (2022), while in the lowest-returning vintage (2015), write-ups in consumer discretionary and IT were somewhat offset by write-downs in financials and other sectors. Values across the key sectors were written up in the largest vintages, 2019 and 2021, with financials and healthcare earning the highest returns in the 2019 cohort, and financials, healthcare, and IT leading the way for the 2021 funds.

LP Cash Flows

In 2023, limited partner (LP) cash flows were on par with activity last seen in 2020, with $137 billion in capital calls and $125 billion in distributions. Both totals represented declines from 2022, a 27% drop in calls and a 12% drop in distributions. Following ten years (2012–21) of distributions equaling or surpassing contributions, over the past two years, calls outpaced distributions by a ratio of 1.2x. However, during the second half of 2023, fund managers returned more capital to LPs than they called, perhaps a hopeful sign for distributions but also an indication of a less active investment environment.

Five vintage years (2019–23) represented 89% ($123 billion) of the capital calls, with each drawing down at least $10 billion during the year; the 2021 and 2022 vintages were the most active, combining to call almost $85 billion. Seven vintages (2013–19) accounted for most of the distributions, and within that group, the 2016–17 and 2019 vintages led the way as each returned about $17 billion to LPs.

Sectors

Figure 3 shows the Global Industry Classification Standard (GICS®) sector breakdown by market value of the PE index and a public market counterpart, the Russell 2000® Index. The comparison provides context when comparing the performance of the two indexes. The PE index continued to have a significant overweight to IT and meaningful underweights to financials, energy, and real estate (the latter two are reflected in the “other” category).

As of December 2023, there were six key sectors by size and IT was by far the largest (36% of the index’s market value). Three of the six large sectors earned double-digit returns for the year (IT, financials, and industrials) and among all six, calendar year returns were best for IT and lowest for communication services.

US Venture Capital Performance Insights

For the second consecutive year, the CA US venture capital index produced a negative return in 2023 (-3.4%), as the industry continued its reset with respect to valuations, fundraising, investing, and exits. Performance for IT companies was a significant drag on the benchmark’s return, a stark difference from the public market indexes, whose rebounds in 2023 were buoyed by a small number of tech-related companies.

According to the National Venture Capital Association and Pitchbook, by number, US VC managers completed about 18% fewer deals in 2023 than they did in 2022 (14,491 from 17,709), a smaller decline than when measured by value ($166 billion from $242 billion in 2022). Exits have declined more dramatically, especially by number. Compared to 2022, total reported exits (1,073) fell 24% in 2023, driven by a slower environment for M&A and buyouts, rather than in IPOs, which were marginally higher in 2023 than in 2022. Values for M&A exits declined commensurately with the drop by number and despite the small increase by number, the value of IPO exits was also lower in 2023 than in 2022. Notably, for the second consecutive year, the value of exits via M&A was higher than those of public listings in 2023, while the number of M&A exits (755) was the lowest of any of the last ten years.

Vintage Years

As of December 2023, nine vintage years (2014–22) were meaningfully sized and combined, accounted for 81% of the index’s value. With one exception (13.9% for vintage year 2022), returns across the key vintages were largely negative, ranging from -9.6% (2014) to -0.8% (2021) (Figure 4). With a 0.5% return in the fourth quarter, the VC index ended its seven-quarter streak of negative returns, its longest since the tech wreck that started at the end of 2000.

For the lone key vintage (2022) that earned a positive return during the year, all sectors except for IT performed well. In the lowest-performing vintage, 2014, all key sectors suffered write-downs. For the 2021 cohort, financials was the biggest drag on returns.

LP Cash Flows

Amid the challenging investment and exit environment, US VC LP cash flows declined in 2023, with capital calls ($30.3 billion) mirroring those of 2020 and distributions ($19.4 billion) hitting the lowest total since 2016. After ten straight calendar years (2012–21) of distributions outpacing calls, the reverse was true the past two years, with calls outnumbering distributions by a ratio of 1.3x.

Four vintages (2020–23) accounted for 89% (roughly $27 billion) of the total capital called during the year. While each vintage called more than $3.4 billion, the 2021 and 2022 groups were the most active, combining for almost $19 billion in total. Distributions were more widespread than contributions, with seven vintages (2012–18) returning at least $1.2 billion to LPs for a combined $13 billion. The 2012 vintage distributed more than $3 billion, the most of any group.

Sectors

Figure 5 shows the GICS® sector breakdown of the VC index by market value and a public market counterpart, the Nasdaq Composite Index. The breakdown provides context when comparing the performance of the two indexes. The chart highlights the VC index’s meaningfully higher exposures to healthcare, financials, and industrials. The indexes are both heavily tilted toward IT, and Nasdaq weightings in communication services and consumer discretionary have remained much higher than those of the VC index.

Collectively, the five meaningfully sized sectors made up 91% of the VC index. Communication services posted the lowest return and industrials the best.

View more investment insights.

Caryn Slotsky, Managing Director
Wyatt Yasinski, Associate Investment Director
Drew Carneal, Associate Investment Director

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.

The post US PE/VC Benchmark Commentary: Calendar Year 2023 appeared first on Cambridge Associates.

We believe success in co-investing is driven by access to robust and high-quality deal flow, and the current market climate creates additional incentives for GPs to expand their co-investment offerings. Private fundraising ² activity slowed in 2022 and 2023, with respective declines of ~21% and ~35% from its peak in 2021. Though 2024 fundraising data show early signs of recovery, private markets have also underperformed public markets in the short term. The continuing distribution drought has led to skepticism among some LPs about the benefits of private investments, which in our experience has created a dynamic whereby GPs have to work very hard to secure fund commitments.

Co-investments play an increasingly important role in today’s fragile environment for two reasons. First, providing co-investment opportunities allows GPs to build goodwill and showcase their expertise to current and prospective LPs. Second, GPs can use co-investments to make their current fund capital go further. Due to the added incentives for GPs, LPs should benefit from improved access to high-quality opportunities, resulting in a more robust funnel. However, the co-investment evaluation process is critical; LPs must remain wary of adverse selection.

Co-investments offer LPs an important tool to control pacing and express market views. While this is true in any investment environment, it is particularly valuable when private market activity slows. In 2023, global private equity capital deployment was down ~46% from its peak in 2021, and in 2024 it is tracking to a ~43% decline from the historic high. ³ Despite this slowdown, GPs are increasingly incentivized to offer co-investments as discussed above. LPs can leverage this co-investment deal flow sourced across GP relationships to manage investment pacing. Further, compared to blind-pool funds, co-investments allow LPs to control specific exposures—and associated risks—in a portfolio. This enables LPs to focus on opportunities that are attractive in the current environment, which can help be identified through the due diligence process. Acknowledging that market volatility has led to allocation constraints for some investors, co-investing can still be a useful tool. Those with direct co-investment programs can adjust annual budgets to respond to market swings, while LPs using co-investment funds can continue to benefit from them by scaling back other commitments.

Co-investments are underwritten based on the current market environment, and today’s landscape should foster more conservative assumptions. Private equity firms synthesize macro and microeconomic data from public and private markets to inform their assumptions that drive financial forecasts and return projections. Typically, GPs provide detailed information about their underwriting to co-investors that can then validate these assumptions as part of their own due diligence process. These factors include, but are not limited to, company valuations, market growth rates, industry dynamics, and the availability and cost of debt. Recently, valuations have fallen from 2021 highs, growth forecasts are more conservative, and higher debt costs have focused sponsors on appropriate capital structures. The confluence of these factors should provide LPs with confidence that the current opportunity set is based on prudent underwriting assumptions. We believe deals struck in this vintage could produce attractive returns in the long run.

While co-investments offer high potential to add value, they are complex to source and execute. Co-investors should have a sound strategy and understanding of where they can be most competitive in finding the greatest value. We believe success is driven by a robust pipeline of opportunities and by having the appropriate resources to be able to transact quickly and efficiently. Today’s market has shifted the incentives of GPs to provide quality co-investment opportunities to LPs, for whom the ability to control capital deployment is increasingly valuable. In response to higher interest rates and a challenging fundraising market, underwriting standards have risen. Co-investors can evaluate these underwriting assumptions and build conviction in today’s opportunity set. Co-investing is a critical component of the private investment ecosystem and one that is particularly attractive today for those that are well positioned and prepared.

Rob Long, Senior Investment Director, Private Equity

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.

The post Are Co-investments Attractive in Today’s Environment? appeared first on Cambridge Associates.

Why Private Credit?

The private credit asset class benefits from several characteristics that we believe are attractive to investors’ portfolios. The asset class has a contractual maturity date, often benefits from collateral, and is senior to the equity in the capital structure. These attributes provide compelling downside protection and a shorter duration relative to private equity and venture capital.

Private credit has historically outperformed public leveraged finance asset classes such as BSL and high-yield bonds. As a private investment, the asset class exhibits less volatility than the publicly traded markets. While public and private credit marks will be driven by credit quality, public markets also include an element of supply/demand (market technical) that can cause mark-to-market price volatility. Depending on credit quality, private credit spreads tend to be 200 basis points (bps) to 600 bps higher than public markets (Figure 2).

Direct lending loans are floating rate, which have limited interest rate risk and help to protect a portfolio from rising rates. Loans will typically be structured with an interest rate floor, which will ensure a minimum level of income. Most strategies will distribute interest income quarterly, and, with an average life of three to four years, principal is returned at a significantly faster rate than private equity strategies. Additionally, with a contractual maturity date, private credit funds have shorter lives than other private investment strategies.

Relative to public markets, private credit strategies offer investors stronger alignment of interest. In the public markets, whether high-yield or BSL, underwriting banks have an originate-and-distribute model. In this model, the underwriting bank will view the borrower as their client, not the investor or holder of the loan. The motivation for the bank as intermediary is to obtain the best deal for the borrower that will clear the market. In private credit markets, the general partner (GP) is often the originator of the loan and the manager of the risk. The GP views the limited partner (LP) as its client, and its objective is to get the best deal possible for the fund.

Private credit strategies, particularly direct lending, benefit from downside protection through a number of contractual provisions. Financial maintenance covenants provide an early warning to deteriorating borrower performance, allowing for lender intervention and the ability to work with the company to influence an improvement plan. Lending on a first-lien senior-secured basis means that the direct lending loan is secured by assets of the company. In the event of a restructuring, private credit’s position in the capital structure means that it will receive a recovery before the equity. If the equity is worth anything greater than zero, then the direct lending loan will receive all its money back plus a return.

Private credit includes a diverse array of strategies allowing investors to build a portfolio of complimentary strategies. The section below reviews the sub-asset classes in more detail, but we believe that the diverse strategies available in private credit allow an investor to construct a portfolio that will be less correlated to equity markets and can produce stable, attractive returns.

Sub-asset Class Review

Figure 3 depicts how private credit strategies offer a range of return targets and fund lives.

Senior Debt

Senior debt, or direct lending, refers to funds that lend money to performing companies on a first lien senior secured basis. The loans will be used for a variety of purposes, including financing leveraged buyouts and acquisitions, funding growth, or repaying existing debt. The company may be owned by a private equity firm (sponsor-backed) or a public or privately owned company (non-sponsor-backed). Managers will tend to focus on company size, with lower middle market defined as companies with $10 million to $50 million of EBITDA; core middle market as companies with $35 million to $100 million of EBITDA; and upper middle market as companies with greater than $100 million in EBITDA. Sponsor-backed core middle market is considered the most competitive area of the market. Upper middle market competes with the BSL market, and, as such, tends to feature weaker terms and less favorable pricing.

The loans will generally be floating rate, based on the secured overnight financing rate (SOFR) plus a credit spread, minimizing interest rate risk, and issued below par to create original issue discount (OID). The loans will be secured by the assets of the company. The fact that the loans are generally secured by all the assets of the company is important as it impacts the recovery value. Historically, first-lien debt has an ultimate recovery value of 70%, while unsecured bonds have a recovery rate of 47%, according to Moody’s.

Senior debt funds may use fund level leverage to increase the capital available for investment in order to increase the returns. Leverage will generally be non-recourse to the LPs and will not be mark to market. The leverage provider could be a bank, another fund, or a structured finance vehicle such as a collateralized loan obligation. The debt used for this purpose will be secured by the loans owned by the portfolio and not by the obligation of the LP to fund a capital call. This is different from a subscription line, which is secured by the fund’s right to call capital from the LPs. Subscription lines do not increase the amount of capital available to invest but instead change the timing of the cash flows, which could increase the internal rate of return. Generally, private credit funds use subscription lines only to facilitate capital calls and will pay the lines down to zero periodically.

Subordinated Capital

Subordinated debt is a loan or security that ranks lower than other loans with regard to claims on assets or earnings. Subordinated debt is a riskier form of debt as it is not repaid until after unsubordinated (senior) debt holders have been repaid in full. Often called mezzanine debt because it ranks between the senior debt and the equity of a company, the debt will frequently include some form of equity, either a co-investment in the common equity alongside the private equity owner or warrants.

The subordinated capital category also includes capital appreciation strategies. These funds will invest, typically in performing companies, anywhere in the capital structure from senior debt to preferred equity. The debt investment will often include some form of equity upside, such as warrants, preferred securities, or in the common equity. As the demand for mezzanine debt has waned in recent years, many mezzanine debt managers have migrated to this strategy. In both traditional mezzanine and capital appreciation strategies, the returns are driven by both the debt security and the equity ownership. Typically, a subordinated capital fund will include between 10% to 20% equity exposure.

Credit Opportunities and Distressed

Credit opportunities refers to a broad range of strategies that are typically opportunistic in nature, meaning they are either investing in companies in stressed or distressed situations, or addressing an unmet capital need in a creative way. Credit opportunities funds may have a broad spectrum of credit and debt-related investments across geographies. Investments can be made in performing, stressed, or distressed companies, and can be directly originated and structured in the primary market or reflect purchases of securities in the secondary market. While the return of a credit opportunities fund will be focused on income, there will often be an element of equity return or capital gain, particularly in more distressed situations.

Credit opportunities managers may pivot to a greater focus on distressed when market default rates rise to elevated levels. Some managers are exclusively focused on distressed situations. Distressed investors target companies or assets where the company is at a high risk of entering bankruptcy or restructuring. While it is not the intent of the fund to own the company, the manager is prepared to take equity through a restructuring and own that equity for a period of time. This strategy differs from distressed for control strategies, where the explicit purpose of purchasing the debt security is to take ownership of the company through a restructuring of the debt. We view distressed for control as more of a private equity–type strategy, as the manager seeks to own and manage companies as its primary activity.

Specialty Finance

Specialty finance managers pursue a very broad array of niche strategies, requiring highly specialized expertise. A key feature of specialty finance strategies is that they provide diversification away from single name corporate risk—either by lending or investing in pools of assets—or investing in assets that are not correlated to equity markets. A common strategy is to lend against a pool of financial assets, such as consumer or small business loans. The fund is essentially funding the non-bank originator of the loans who may remain as the servicer of the loans. The loans are placed into a special purpose vehicle, which insulates the investment from distress at the originator as the loans can be moved to another servicer. The loan will be structured by looking at historical default and loss rates and requiring the originator to retain the first loss piece, or cushion, to the pool. This is similar to the process used to create asset-backed securities. Another common strategy is for the fund to own a portfolio of equipment, such as rail cars or aircraft, and lease the equipment to create a cash flow stream.

Other strategies include investing in royalties. In life sciences, managers may invest directly in the royalty, helping the company or other entity that owns the royalty to monetize its asset by allowing the fund to collect the royalty payment for a period of time. Similarly, in music royalties, the artist can monetize its catalogue by selling the royalty payments. Increasingly, life sciences managers have moved to a lending strategy where the patent is taken as collateral. This will shorten the duration of the investment. Additional strategies include life settlements, insurance, trade finance, litigation finance, and non-performing loans.

Specialty finance can have a wide range of return targets and duration depending on the strategy. Consumer lending tends to be very short, while royalties—particularly music royalties—can be very long dated. Returns can range from the high single digits to the high teens.

Implementation

With the variety of private credit strategies available, we believe it is possible to create a well-diversified portfolio that can generate income and provide some upside. We like to construct portfolios with a mix of senior debt, credit opportunities, and specialty finance strategies (Figure 4). Senior debt strategies generate cash flow and provide a ballast to the portfolio, offering downside protection and income. A credit opportunities strategy should generate returns higher than direct lending during benign markets, and, importantly, will benefit from market stress and dislocations. The funds can offset any stress that may be seen in the senior debt strategies during periods of elevated defaults. An allocation to specialty finance will provide diversification away from single name corporate risk.

When constructing a portfolio, an investor’s primary objective will influence allocation to the different sub-strategies. For example, an income-oriented investor may focus on direct lending strategies, picking a diversified group of managers to gain exposure to sponsor and non-sponsor and across the borrower size categories. This portfolio may also consider an allocation to income focused specialty finance strategies to provide some diversification. The portfolio should provide a stable income stream, 100 bps to 200 bps higher than the public leveraged finance markets, with lower volatility and risk profile.

Investors more focused on returns will gravitate to higher returning strategies in credit opportunities and distressed. Strategies may focus across different asset classes, such as corporate, real estate, and structured products. A portfolio constructed this way could be attractive to a tax-paying investor, as it can focus on strategies that offer a greater degree of capital gain relative to income.

Investors seeking a diversified allocation to private credit may invest across the different sub-asset classes, such as senior debt, credit opportunities, and specialty finance. We believe that a portfolio constructed this way can deliver an attractive income stream, coupled with some higher returning credit opportunities strategies that can also benefit from a dislocation. The addition of specialty finance will serve to diversify away from corporate risk. Investors can weight the components depending on their preference for income relative to higher returning strategies.

Investors allocate to private credit from various parts of their portfolios. Some investors will have a specific allocation to private credit as part of their total portfolio. Investors that allocate from their illiquid buckets will often focus on higher returning strategies as they are comparing the funds to their private equity and venture allocations. In a zero-rate environment, many investors looked to direct lending to improve returns in their fixed income allocations. Finally, many investors have looked to their diversifiers bucket to carve out a piece to allocate to private credit, recognizing that the lock-up nature of the funds is illiquid relative to the rest of that allocation, but that the private credit portfolio can generate some income and an attractive return.

Conclusion

The private credit market has developed and evolved significantly since the GFC. The asset class includes a broad array of strategies to satisfy investors’ return objectives. Strategies can be cash flow generating and offer shorter duration than other private investment strategies. Downside protection creates an attractive risk mitigant relative to private equity and venture strategies. Investors can construct portfolios to provide income, benefit from market dislocations, and provide some diversification away from single name corporate risk.

Frank Fama, Co-Head of Global Credit Investment Group

Walker Haymond, Brittney McManus, and Ilona Vdovina also contributed to this publication.

Index Disclosures

Bloomberg Aggregate Bond Index
The Bloomberg Aggregate Bond Index is a broad-based fixed income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

Bloomberg US Corporate High Yield Index
The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the indexes’ EM country definition, are excluded. The US Corporate High Yield Index is a component of the US Universal and Global High Yield Indexes. The index was created in 1998, with history backfilled to July 1, 1983.

Bloomberg US Treasury Index
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting. The US Treasury Index is a component of the US Aggregate, US Universal, Global Aggregate, and Global Treasury Indexes. The index includes securities with remaining maturity of at least one year. The US Treasury Index was created in March 1994, and has history back to January 1, 1973.

Morningstar LSTA US Leveraged Loan 100 Index
The Morningstar LSTA US Leveraged Loan 100 Index is designed to measure the performance of the 100 largest facilities in the US leveraged loan market. Index constituents are market-value weighted, subject to a single loan facility weight cap of 2%.

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.

The post Private Credit Strategies: An Introduction appeared first on Cambridge Associates.

At present, short-term private equity returns do not compare favorably to those of public benchmarks. For the nine months ended September 30, 2023, global private equity and global venture capital underperformed the MSCI ACWI on a public market equivalent basis to the tune of 500 basis points (bps) and 1,400 bps, respectively. And, based on the strong public equity market performance through year-end 2023, as we wait for fourth quarter private investment numbers to finalize, we expect this pattern to continue.

Private investment managers incorporate public market comparables to varying degrees into their investment valuation methodologies, so it is not unusual to see private company valuations move somewhat in tandem with those of the public markets. However, this relationship often severs during extreme periods when the public markets move like an express train in either direction (up or down) due to rapidly processed information. Private markets move more like a local train, processing information (and incorporating it into valuations) on a quarterly basis. In 2023, fueled by a rally in the “Magnificent Seven” tech stocks and boosted by enthusiasm around artificial intelligence, the public markets quickly revalued upward, hitting new highs on a regular basis.

By contrast, the private markets continued to incrementally revalue downward from their arguably inflated 2021 highs and remained decoupled from the public markets. Global private equity valuations declined, then leveled out in 2023, but have not improved further. Global venture capital valuations continued their downward trend in 2023, lagging even further behind, as valuation “resets” in venture often happen during subsequent financing exercises, whenever they occur. With the percentage of flat or down rounds nearly doubling in 2023 from levels in the prior two years, many venture-backed companies have tried to delay that “reset” moment for as long as possible by conserving cash. One way to conserve cash is to reduce headcount. In fact, in 2023 there were 18x as many tech layoffs globally than in 2021, a clear indication many companies tried to hit the snooze alarm on raising another round.

It doesn’t help matters that the underperformance relative to publics has occurred during a private markets “distribution drought.” Distributions to limited partners (LPs) have fallen to their second lowest point for global private equity and their lowest point for global venture capital in more than 20 years, based on our distribution yield analysis. ⁴ Many investors are experiencing the dearth of returned capital from their private investment programs at the same time as program returns are underperforming relative to public markets, raising questions about the value of private investments in a program at all.

The longer the distribution drought continues, the greater the pressure on general partners (GPs) to return capital to LPs, preferably at acceptable levels of return. While that pressure is building, it is worth noting it takes an average of nine and ten years, respectively, for global private equity and global venture capital funds to distribute 1.0x the capital that has been paid in (DPI), which is essentially the same thing as returning cost back to investors. This underscores the time it takes for the private markets to deliver on expectations. The drought will end, but it won’t happen overnight. GPs can’t legally hold on to their investments forever, and delaying exits too long will impact internal rates of return and hinder their ability to raise subsequent funds. One hopeful development in 2024 is the cost and availability of leverage are becoming more favorable, combined with revalued investments, could potentially result in more transaction activity in 2024 and, therefore, more distributions.

Experienced LPs understand private investing is a long-term strategy with performance tracked in years, not days or even months. Zooming out from the one-year return and refocusing on timeframes where private market returns are better expressed, global private equity and venture returns delivered nearly double the equivalent public market performance over three-, five-, and ten-year periods. That said, short-term public market eclipses do occur, so this moment will happen again; over the last 33 years, one-year public market returns have bested global private equity returns nine times and global venture capital returns 14 times. These eclipses can obscure the contributions private investments make to a program. They are only temporary.

Andrea Auerbach, Head of Global Private Investments

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.
4. Cambridge Associates defines distribution yield as distributions to LPs divided into beginning net asset value.

The post Have Public Market Returns Permanently Eclipsed Private Market Returns? appeared first on Cambridge Associates.

Ultimately, overestimating liquidity risk and the denominator effect can prevent pensions from fully optimizing their portfolio’s return potential. This paper aims to help pension executives better understand how data can enable their effective use of PI. It also discusses how new investment policy approaches may help to take advantage of market opportunities and minimize the risk of portfolio stress when down markets occur.

Following the Data

It is no secret that investing in private markets can add considerable portfolio value. Investors that have allocated to these asset classes over the long term have tended to outperform investors holding only public asset classes. And investors that managed to allocate primarily to top quartile PI managers have tended to perform even better (Figure 1).

As pensions consider PI investments, data analysis based on historical returns for private markets can help them make more informed decisions. This analysis can yield insights about how PI allocations have previously behaved across different market environments.

For example, when a crisis scenario hits, private markets are expected to react. But in reality, the severity and duration of these market reactions are not instantaneous or uniform. In crisis conditions, private market asset values and cash flow generation can decrease—but contributions can also decrease—as asset managers have fewer investment opportunities. In the years immediately following a crisis, exit opportunities present themselves and PI-buying opportunities emerge, albeit typically with lower returns than a more normal market environment.

Figure 2 compares contributions and distributions from a sample private equity fund in hypothetical base-case, crisis, and boom environments. It shows how different market situations can impact the timing of capital calls by fund managers, as well as when capital is returned to investors. Contributions are deferred in crisis scenarios as managers typically wait until opportunities present themselves, while capital is often called quickly in boom scenarios. In both environments, it is typical for most capital commitments to be called by the manager over the total investment horizon. Conversely, distribution trends track nearly parallel for all three scenarios, echoing the returns of the public market. ⁵

Putting it all together, whenever a crisis ensues, public market portfolios are immediately affected, but the value of a PI portfolio lags because valuations occur less frequently. Furthermore, private markets will call and return capital more slowly. In order to fully understand and interpret the potential impact of PI investments on pension portfolios, this complex web of inputs and outputs requires careful analysis.

Modeling an Investment Portfolio

Liquidity is a key factor for pensions investing in the private market, but at what level does the lack of liquidity cause serious risks to the pension? Figure 3 paints a broad picture of liquidity risk as a function of net distributions. In this case, net distributions is the percentage of outflows required to pay benefit payments and expenses, minus contributions.

Using this simple framework is an effective way to consider the appropriate PI allocation for a pension. However, it’s important to note that because each pension’s risk and payment profile is unique, more detailed and bespoke modeling may be necessary. This is particularly true for those that intend to invest heavily in the PI market.

Modeling can also help to inform PI allocation dynamics over time. Figure 4 demonstrates a potential PI allocation path for a sample pension. In this example, the pension has a 25% target allocation to privates, is currently paying out 5% of assets per year in benefit payments, has benefit accruals equal to 1% of pension liabilities, and is currently above PI target by 5% due to recent market movements. ⁶

Here, it makes sense to start with a micro view of the assets to ascertain expectations under base-case, boom, and crisis scenarios to inform a more refined application that allows a broader range of randomness like a Monte Carlo simulation model. ⁷ The simulation model cannot be created without the scenario modeling.

In addition to forecasting potential PI portfolio dynamics, simulation modeling analyzes the non-PI portfolio, the liability plan profile, and broader capital market forecasts. The resulting “cone of doubt” in Figure 4 is based on 5,000 return simulations, with PI values informed by the three market scenarios discussed above. As in Figure 3, models such as this can provide a view to the potential liquidity risk inherent in the pension.

In this example, the model suggests an 81% probability that, in ten years, the PI allocation percentage will be less than where it is today. Furthermore, in the few future scenarios where the portfolio exceeds 35% in privates by 2029, there is a 71% likelihood that the proportion of PI in the portfolio will then decrease. These metrics suggest that the likelihood of a liquidity crisis is low—even in a stressed market environment—as is the risk that the portfolio will be overweight PI for a prolonged period. Thus, if an investor is willing to accept an elevated allocation to privates in the near term, then a decrease in private asset commitments, or a sale of private assets at a discount in the secondary market, is unnecessary.

Reconsidering PI Ranges

It is typical for pensions to express predefined thresholds for allocations within their investment policy statement (IPS). A well-constructed IPS dictates boundaries across all asset classes and informs decision making related to trading and rebalancing. However, in the case of a PI portfolio, there are few ways to remedy an overallocation in the near term. As Figure 4 shows, even in a simulation model where the IPS boundaries are breached, an overallocation to PI is unlikely to remain above the threshold for long—and unlikely to cause a lasting liquidity crunch. These scenario projections can help bolster confidence on the part of pension executives, demonstrating that there is enough liquidity in their portfolio and that their allocation is likely to return to their IPS range over time. While the above depicts a sample case, scenario modeling such as this can be customized to specific situations.

Governance and Target Ranges

The topic of IPS ranges brings up the question of what boundaries are necessary for pensions with PI allocations. In fact, it can be optimal to create two sets of boundaries. The first is a soft guideline that, when breached, flags that the allocation is above target and action may be necessary. A second set of boundaries can be used to demarcate the point at which immediate action is warranted. When setting these two boundary ranges, it is important to note that the larger the target of the private allocation, the broader the ranges should be. For example, a 5% boundary on a 10% allocation may be reasonable but is most likely insufficient for a 25% allocation.

What If?

When pensions find themselves in the middle of a market crisis, it can be difficult to stay rooted to analysis conducted during a calmer period. However, it is at this precise moment that a pension executive’s investment decisions can lead to the largest swings in PI value. For plans looking to sell in the secondary market to lower their illiquid allocation, the lost value is clear—their holdings will sell at a deep discount, locking in losses. However, for those interested in cutting commitments to new funds, outcome analysis depicts murkier results.

For example, what if decision makers overseeing the sample pension described earlier determine that the continued risk of the private allocation increasing is too high and move to cut their next three years of commitments by half? What amount of change can they expect in asset values? These questions can be answered using further simulation modeling, but the general outcome is that the pension has more surety of the liquidity profile at the expense of lower returns.

Looking back at Figure 1, a top quartile private equity performer may outperform the US equity market by ~15% per annum and—assuming a one-time, three-year decrease in commitments—the impact to the pension is a net decrease in assets of ~2%. ⁸

Model Outcomes

Scenario modeling of PI holdings can yield a crucial takeaway for pension executives: don’t fear the denominator effect. While the magnitude of this effect is conditional on a portfolio’s broader allocation strategy, analysis suggests that, overall, it is an uncommon and typically short-lived phenomenon. Pensions with an effective investment governance framework that build a PI portfolio tailored to their investment objectives can use modeling to strengthen their conviction in the ability of optimized PI allocations to deliver stronger portfolio returns without imposing too much additional risk. Pension executives can also use scenario modeling to better assess how to balance their pension’s liquidity requirements against PI growth opportunities as they work to meet their investment objectives over time.

Jacob Goldberg, Senior Investment Director, Pension Practice

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.
4. Cambridge Associates defines distribution yield as distributions to LPs divided into beginning net asset value.
5. This is a summary of broad private equity and does not detail any other private asset classes that have a shorter or longer investment horizon. Those separate private assets have a similar contribution/distribution profile.
6. For the sample simulation, a 60/40 portfolio consisting of asset class targets 25% equities; 10% hedge funds; 40% long government/credit; 10% private equity; 10% private credit; and 5% real estate. The PI portfolio is assumed to be mature and returning 25%–30% of capital committed, while continuing commitments to target the 25% target weight.
7. A Monte Carlo simulation model seeks to predict the probability of a variety of outcomes when the potential for random variables is present.
8. It is assumed that commitments decrease by ~2.7% of total assets and that the capital is drawn over six years and returned by year 13 with a total DPI of 2.6x.

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Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.
4. Cambridge Associates defines distribution yield as distributions to LPs divided into beginning net asset value.
5. This is a summary of broad private equity and does not detail any other private asset classes that have a shorter or longer investment horizon. Those separate private assets have a similar contribution/distribution profile.
6. For the sample simulation, a 60/40 portfolio consisting of asset class targets 25% equities; 10% hedge funds; 40% long government/credit; 10% private equity; 10% private credit; and 5% real estate. The PI portfolio is assumed to be mature and returning 25%–30% of capital committed, while continuing commitments to target the 25% target weight.
7. A Monte Carlo simulation model seeks to predict the probability of a variety of outcomes when the potential for random variables is present.
8. It is assumed that commitments decrease by ~2.7% of total assets and that the capital is drawn over six years and returned by year 13 with a total DPI of 2.6x.

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This paper addresses this challenge. It explains the historic role that PI allocations have had in generating strong returns for large investors with longer time horizons. Next, it lays out how target date funds (TDFs), which are professionally managed pools with long time horizons, can serve as the vehicle to provide exposure to PI, while simplifying the plan participant experience. Additionally, this paper explores how to incorporate a range of PI in a TDF glide path, optimize the ability of these funds to take on illiquidity, and maximize the probability of success. Lastly, it touches on keys to successful implementation of a value-generating PI program within a TDF structure. Expanding the asset class opportunity set to include PI can provide DC plan participants with exposure to the same higher return potential seen in the broader institutional investment world, and, if implemented effectively, can result in improved retirement outcomes.

Status Report: Where Are Institutions Allocating?

The investment behavior of institutional investors over the last several decades has been meaningfully different from that of DC plan participants, where diversification away from traditional stocks and bonds has been minimal. By contrast, institutions have steadily increased allocations to alternative assets—including PI, hedge funds, infrastructure, and real assets—which now represent more than 25% of total portfolio allocations on average.

The Use of Alternatives in Institutional Portfolios: First Movers

The first movers in building more diversified portfolios were endowments and foundations, which have been significant investors in the space since the 1990s. Many endowments, as reflected in Cambridge Associates’ own client experience, have had allocations to alternatives above 20% for more than two decades and today allocate well over one-third of their assets to these investments (Figure 1).

Many defined benefit plan sponsors have taken note of strong returns among endowments and foundations and followed suit with increased exposures to alternatives. Public plans have seen the largest increase, especially over the last 15 years (Figure 2).

Corporate plans, particularly underfunded plans that are seeking growth rather than de-risking into liability-driven investment strategies, have also raised their allocations. Family offices have made significant allocations as well, currently investing an average of 43% of their total investable assets in these strategies (Figure 3).

What do these investors all have in common? The longer time horizons and institutional scale needed to reap the rewards of alternatives. While DC plans (particularly TDFs) share these characteristics, they have remained a notable outlier in their allocation decisions thus far.

Better Returns Through PI

Institutional investors have increasingly incorporated PI—along with other alternatives—in search of higher returns, and the data show that they have been successful in that endeavor. This can be seen by looking at the performance of endowed institutions with similar investment objectives. Those with high allocations to PI have outperformed those with more liquid, traditional portfolios (Figure 4).

This is especially true for those who have invested in less liquid assets, such as private equity (PE), which has generally outperformed its public counterpart over the last several decades (Figure 5).

It is also worth noting that PI offers an expanded opportunity set for investors, given that the overall number of investable opportunities in the private and public spheres are moving in different directions. Between 1996 and 2019, for instance, the total number of publicly listed US companies decreased by 47%, while the number of private equity and venture capital (PE/VC) investment opportunities grew by 85%. ⁹

Private Investing: Why?
Participant Benefits
• Higher return potential relative to public markets
• Exposure to innovative, early stage, high-potential growth companies
• Access to larger opportunity set relative to contracting public company universe
• Greater diversification

Forward-looking modeling shows the potential benefits of including alternatives in a target date glide path. An allocation of 10% to PI—divided between PE and private credit—can result in approximately 3% of additional income replacement in retirement, which is comparable to increasing a savings rate by 1%. ¹⁰

As noted earlier, the institutions that have been most able to benefit from investing in PI are professionally managed pools with a longer time horizon. The question is—how can that approach be adapted for the benefit of DC plan participants? TDFs can help bridge this gap.

The Place for PI

We believe the best place to include PI in a DC plan is through a multi–asset class portfolio, such as a TDF, which can provide the necessary professional oversight. This supervision is key, as the complexity and range of outcomes from PI make them extremely challenging for participants to manage themselves. TDFs can provide plan participants access to more sophisticated investment strategies through an easy-to-use vehicle with professional oversight. In most TDFs composed of traditional assets, a manager oversees underlying asset class exposures, asset allocation changes, and rebalancing. Enabling a professional fiduciary to oversee the inclusion of private assets in a TDF is simply a logical extension of this framework.

Incorporating PI through a multi–asset class pool also means that a participant does not need to focus on liquidity management or overall risk. Plan sponsors can take comfort that they have selected a professional portfolio management team to oversee these investment options without burdening participants with the task of conducting complex due diligence and decision making.

Range of PI Categories

Private investments are often lumped together as a single group of strategies, but their effective use in portfolios requires a more nuanced understanding. The most successful implementation approaches are those that fully recognize how different PI types can serve DC plan portfolios in different ways. Most often, certain allocations are appropriate at distinct parts of the glide path, helping to address participant needs at the appropriate time(s). Figure 6 reviews some of the major PI categories available to DC plans.

Close consideration of the roles that each of these investment categories can play in a portfolio helps to inform how to include them in the TDF glide path. Plan sponsors may be able to make the largest impact on overall performance by replacing a portion of the portfolio’s public equities with PE/VC and secondaries, and by replacing a portion of the public fixed income portfolio with private credit. While real estate and infrastructure provide some diversification, investors generally will achieve more bang for their illiquidity buck through PE and private credit. Making these changes will allow plan sponsors to better optimize the performance impact of taking on illiquidity relative to available traditional assets. The breakdown of these strategies can change across the glide path to reflect the needs of participants at each point in their lives (Figure 7).

Answering the Liquidity Question

Today, the DC system operates in a daily valued—and mostly daily traded—context, which translates into a need for robust liquidity. Assets with less than daily pricing and liquidity are already included within DC plans (for example, private companies as part of a public equity portfolio, or lower quality parts of the fixed income market). However, including a meaningful allocation to significantly less liquid assets requires careful thought and oversight to ensure that the plan is able to meet participant needs. Overall, an allocation of roughly 10% to illiquid investments balances the need to maintain plan liquidity, while still providing sufficient exposure to PI to move the needle and help accomplish participant investment goals. When thinking about liquidity, it is important to remember that the remaining 90% of the portfolio is liquid and available for cash needs.

Combined with available liquidity from the remainder of the portfolio, there is often more liquidity available from PI than is generally assumed. A mature PI portfolio is typically cash-flow positive—distributions are higher than contributions, particularly for a portfolio that includes private credit. These distributions can be used to meet participant liquidity needs or may be reinvested in the portfolio, all while maintaining sufficient total liquidity.

In addition to ensuring sufficient day-to-day liquidity, it is also important to stress test a portfolio to confirm that liquidity will remain sufficient even during down markets. The hypothetical example illustrated in Figure 8 incorporates both capital market and cash-flow stresses and provides some context for a perfect storm, adverse liquidity event.

The Name of the Game Is Implementation

Ultimately, taking advantage of the growth opportunities and diversification benefits of PI in DC plans requires negotiating two challenges: (1) building a well-designed PI portfolio and (2) situating this portfolio effectively within a TDF structure.

Manager Selection Matters

Even more so than with traditional asset classes, how private investments are implemented can spell the difference between success and mediocrity. For example, private markets can provide outsized returns, but the dispersion between the best- and worst-performing managers in PI is much larger than it is for public assets (Figure 9). In other words, while the benefits of getting private market allocations right can be far greater than with traditional asset classes, the consequences of getting them wrong can be markedly detrimental. Thus, working with an expert that has proven capabilities to conduct thorough due diligence on fund managers should be a top priority.

Performance dispersion across managers is just one of many reasons why building a properly diversified portfolio requires significant expertise. Other variables, including time (vintage year), sub-strategy (such as growth, buyouts, and venture capital), and knowledge of underlying general partners (GPs) must also be closely considered. As mentioned, secondaries can also be used to help kick-start a program. This requires proficiency in modeling private exposure(s) over time—how much capital to commit and to which managers—to properly build toward future portfolio success. As liquidity and portfolio size change, this modeling needs to be revisited—and the commitment plan adjusted—to match the evolving portfolio dynamics.

A Pooled Approach

When incorporating PI in a TDF, getting the structure right is essential, as this allows returns generated by the allocation to meaningfully benefit participants. This can be achieved most effectively by creating several pooled funds—or sleeves—for each of the major asset types: PE/VC, secondaries, and private credit. Each sleeve can include a minimal amount of liquidity for purposes of capital calls and distributions, but the primary source of liquidity is derived at the TDF level, as opposed to seeking meaningful liquidity within the private sleeves. These can invest in individual private investments, allowing for appropriate management of each underlying strategy. This structure also allows for a daily valuation process at the private sleeve level, based on the aggregate exposure to underlying managers. Each vintage of the TDF series can invest in these underlying funds, like the structure used by most TDF funds to invest in traditional asset classes. The pooling of PI into sleeves, and the accompanying pooling of cash flows, allows each TDF vintage to individually manage its exposure to each PI asset class.

Private Investing: How?
Keys to Success
• Simplified participant experience through inclusion in TDFs
• Experienced professional investment management
• Diversification across asset categories, adjusted for participant life stages
• Expert manager and fund selection
• Asset class–specific pools, with liquidity management occurring at the total TDF level

It is important to remember that private investments are less liquid than traditional stocks and bonds—each TDF vintage will not be able to precisely rebalance to a specific target the way a portfolio of more traditional assets can. The portfolio management team can accommodate by adjusting the allocations to corresponding pools of public asset classes to maintain the portfolio’s desired risk exposures. To this end, ranges around allocation targets should be designed to provide sufficient flexibility to account for the nature of PI.

Right Mix, Bright Future

A growing number of organizations are considering the use of PI in their DC plans as they strive to offer an optimized line-up of investment strategies to their employees and work to ensure a secure financial future for their plan participants. For those who opt to include them, the most successful approach will be one that is informed by both the growth opportunities and risks associated with more illiquid asset classes. DC plan sponsors should consider building out their plan’s PI allocation options via a TDF structure, using a methodology that matches the efficiency and choice available to participants in the form of more traditional assets. While this approach can result in increased investment management complexity, working with an experienced partner can help. Moreover, PI returns have historically compensated plan sponsors for the additional complications and cost. Regardless of preferred vehicle, having a clear understanding of investment strategy options and how they relate to existing traditional assets is fundamental to success. Proper portfolio implementation, including identifying and investing with top GPs, is also necessary.

Today’s DC plan participants desire—and deserve—institutional-quality investment management, including the diverse selection, robust due diligence, and potential returns that this classification implies.

Hayden Gallary, Managing Director, Pension Practice

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.
4. Cambridge Associates defines distribution yield as distributions to LPs divided into beginning net asset value.
5. This is a summary of broad private equity and does not detail any other private asset classes that have a shorter or longer investment horizon. Those separate private assets have a similar contribution/distribution profile.
6. For the sample simulation, a 60/40 portfolio consisting of asset class targets 25% equities; 10% hedge funds; 40% long government/credit; 10% private equity; 10% private credit; and 5% real estate. The PI portfolio is assumed to be mature and returning 25%–30% of capital committed, while continuing commitments to target the 25% target weight.
7. A Monte Carlo simulation model seeks to predict the probability of a variety of outcomes when the potential for random variables is present.
8. It is assumed that commitments decrease by ~2.7% of total assets and that the capital is drawn over six years and returned by year 13 with a total DPI of 2.6x.
9. This compares the decrease in publicly listed companies from 1996 to 2019 against the increase in unrealized and partially realized institutional private investments from 1996 to 2020.
10. This is based upon Cambridge Associates’ Capital Market Assumptions projected over 60 years using a Latin Hypercube model with 5,000 iterations. We modeled the same participant profile, isolating the change in investment design using 10% of total assets in PE and credit compared to public equities and bonds. For purposes of this analysis, we used a sample 35-year-old participant contributing 11% to 19% to their retirement account, 1.3% to 4.3% real salary increases, and withdrawing 70% of their pre-retirement income at age 65, while offsetting for social security. This analysis compares the assets at retirement and how long those assets last in retirement under the two investment designs.

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According to new research from BCG and Cambridge Associates, private equity and venture capital firms whose ownership is predominantly women or people of color may unlock access to differentiated deal flow (i.e., an increase in the variety of investments in a portfolio) for their limited partners (LPs) and other investors.

Key Findings:

Of the deals analyzed, 76% were financed exclusively by nondiverse private equity and venture capital firms, 17% of the transactions had deal syndicates with a mix of nondiverse and diverse firms, and 7% were investment rounds completed exclusively by diverse-owned firms. Here is what we found:

• Diverse asset managers are more likely to invest in early-stage deals than nondiverse firms as well as in historically overlooked companies.
• Because they tend to work within networks they are familiar with, many nondiverse private equity and venture capital firms (35%, according to our research) have not coinvested with diverse asset managers. As a result, they risk facing reduced exposure to differentiated deal flow and reduced engagement with diverse private fund managers in later rounds.
• Diverse asset managers are increasing their share of private market deals. From 2018 to 2022, the value of the deals led by diverse private equity and venture capital firms grew at 25% annually from a starting point starting of $33 billion. This is nearly twice the growth rate of deals completed by nondiverse firms. The number of private market deals led by diverse firms also grew by 14% annually, in the same period.

Read the full report here.

Footnotes

1. Cambridge Associates’ mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
2. Private fundraising refers to buyout and growth equity funds.
3. The 2024 fundraising activity is annualized based on data as of March 31, 2024.
4. Cambridge Associates defines distribution yield as distributions to LPs divided into beginning net asset value.
5. This is a summary of broad private equity and does not detail any other private asset classes that have a shorter or longer investment horizon. Those separate private assets have a similar contribution/distribution profile.
6. For the sample simulation, a 60/40 portfolio consisting of asset class targets 25% equities; 10% hedge funds; 40% long government/credit; 10% private equity; 10% private credit; and 5% real estate. The PI portfolio is assumed to be mature and returning 25%–30% of capital committed, while continuing commitments to target the 25% target weight.
7. A Monte Carlo simulation model seeks to predict the probability of a variety of outcomes when the potential for random variables is present.
8. It is assumed that commitments decrease by ~2.7% of total assets and that the capital is drawn over six years and returned by year 13 with a total DPI of 2.6x.
9. This compares the decrease in publicly listed companies from 1996 to 2019 against the increase in unrealized and partially realized institutional private investments from 1996 to 2020.
10. This is based upon Cambridge Associates’ Capital Market Assumptions projected over 60 years using a Latin Hypercube model with 5,000 iterations. We modeled the same participant profile, isolating the change in investment design using 10% of total assets in PE and credit compared to public equities and bonds. For purposes of this analysis, we used a sample 35-year-old participant contributing 11% to 19% to their retirement account, 1.3% to 4.3% real salary increases, and withdrawing 70% of their pre-retirement income at age 65, while offsetting for social security. This analysis compares the assets at retirement and how long those assets last in retirement under the two investment designs.

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