Private equity investors who wonder whether they would be better off investing in a stock index will now have a simpler way of getting the answer.
PitchBook Data Inc., the Seattle-based research firm, is tossing out what it considers a new metric. It compares returns of private equity and venture capital with public market indexes — the Russell 3000 and Russell 2000 Growth, respectively.
Internal rate of return and multiple of invested capital are measures of absolute performance, said Adley Bowden, PitchBook's director of research.
“They measure performance relative to the industry but not relative to the public markets,” he said. “This (new metric) ties in with something that has been kicked around in the academic sector but is not in widespread practice yet.”
An analysis using the so-called public market equivalents method revealed that in the 13 years ended Dec. 31, private equity outperformed while venture capital underperformed the public stock index. Between Jan. 1, 2000, and Dec. 31, 2012, private equity funds generated a compound annual growth rate of 7.9% compared with the Russell 3000 index's 2.6%. In venture capital, however, the CAGR was -2.8% compared with the Russell 2000 Growth index's 3.1% for the same period.
This article originally appeared in the September 30, 2013 print issue as, "PitchBook says it has a way to get the answer".