Investors urged to rethink private asset modelling strategies
Investors are being urged to rethink their private asset modelling and allocation strategies due to a lack of robust benchmarks for returns and volatility, and the changing dynamics of the market.
According to a new report from investment consultancy bfinance, there has been a marked pivot towards GP-led secondaries, continuation vehicles, and semi-liquid structures over traditional IPOs and M&A exits.
Meanwhile, almost half (47 per cent) of investors expect compression in illiquidity premiums. The report has suggested that investors re-evaluate their assumptions around returns, while revisiting their modelling techniques and governance frameworks in light of these shifting trends in private markets.
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Bfinance said that a lack of robust benchmarks for returns and volatility creates asset allocation challenges, and noted the importance of using time-weighted returns over IRR in asset allocation.
The report suggested that private market investors should assume a two per cent premium for buyout funds and a three per cent premium for venture capital going forward, and warned investors not to assume that private market investments will consistently outperform public markets.
“Private markets are evolving fast, and investors must rethink allocation, risk, and governance,” said Ruben Mutsaers, senior director, portfolio solutions at bfinance.
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“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.”
The report also highlighted the diversification benefits of private markets, and added that a weakening correlation between private and public markets supports private market allocations as a diversification tool, particularly amid rising concentration in global public equities.
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