There’s something nasty about hammering US public pension funds. In the US, large public pension plans that invest in private equity mostly measure these investments against a public equity performance yardstick. Aon reported that 62 per cent of the top 50 US public pension plans benchmark their private equity portfolios against listed equity benchmarks.

Measuring private equity performance has its own猫. Ludovic Phalippou at Oxford has written about problems of using internal rates of return (IRRs). Before the pandemic IRRs were super high and many in the industry accepted them as gospel. The debate also includes time‑weighted returns, DPIs, TVPIs, and public‑market equivalents.

Comparing small‑and‑medium‑cap private companies with global stock indices is problematic because megacap trading swings indices and PE valuations lag regular quarterly reporting. The Washington State Investment Board (WSIB) with over $53bn of PE has trailed its benchmark by an enormous 13 per cent per year over the past three years.

Experts

Karen Rode, senior partner for private investments at Aon, says changing the benchmark is a momentous decision. Alex Beath prefers a lagged public index, preferably small‑cap. Andrea Auerbach of Cambridge Associates wants those hurdles taken “off the table.” Pension funds must post big numbers to catch up with public indices.