Investors Getting Better at Judging Private Markets Managers

Although most investors and consultants still find due diligence difficult, evaluating manager track records is getting easier, says eVestment.


Manager due diligence is getting easier in the private markets sector, according to new research from eVestment.

The survey, which included responses from pensions, endowments, private equity funds-of-funds, and consultants, found that 40 percent believed it was “easy” to compare manager performance numbers on a “fair and consistent basis.” This is nearly double the number from last year, when 22 percent said manager comparison was easy.

However, the majority still found performance comparison to be a “difficult and complex issue,” eVestment reported. Survey respondents said they needed greater transparency, more standardized reporting, better benchmarks, and consistent performance methodologies to improve their due diligence abilities.

The ability to rate managers has become increasingly important as private market assets have earned a sizeable place in institutional portfolios, with pensions, endowments, and foundations now allocating more than a tenth of their total portfolios to the asset class, according to eVestment. The average public pension invests 16 percent of its assets in private markets, with the largest commitments made to private equity and real estate funds.

Currently, limited partners and consultants rate the investment team as the most important factor in manager selection, followed by strategy and track record. Just 39 percent of limited partners viewed fees as “extremely important,” while only 4 percent thought environmental, social, and governance factors were that important.

When evaluating a manager’s track record, 78 percent of respondents often or always trusted the numbers reported by managers. However, 43 percent said they always recalculated manager track records themselves, and 33 percent did so “often.”

One state pension told eVestment that it recalculated performance as often as possible not because those numbers tended to be false, but because “managers will certainly cherry pick elements of their track record — so the issue isn’t [so much] inaccuracy or misrepresentation as it is selective representation.”

According to the survey, bigger investors were more diligent about adding up manager performance numbers themselves, with 75 percent of institutions larger than $5 billion reporting that they always engaged in the practice. Meanwhile, just 28 percent of funds under $1 billion said the same.

Net-of-fee performance was considered by far the determining factor in evaluating manager track records, rated by 85 percent of respondents as “extremely important.” Drivers of value and performance were also influential factors up for consideration, with roughly half of respondents viewing value creation and deal attribution as extremely important.

Public market equivalent analysis, meanwhile, has become more widely adopted, with 81 percent now using the tool to measure managers, up from 69 percent last year. Graeme Faulds, director of private equity solutions at eVestment, said the increasing use of these methodologies showed investors were getting better at judging private markets managers.

“Across the different respondent types and geographies, it was clear that investors continue to increase their sophistication in how they conduct due diligence,” he said.