Replicating the returns of private equity and venture capital, two murky asset classes, is possible. Rather than investing in private companies directly, there are indexes that seek to replicate the industries' returns by constructing portfolios of liquid, U.S. large-cap equities. These portfolios are designed to mirror the characteristics and returns of the private markets.
The first step in creating a replication strategy is to create baseline research indexes. The indexes must first contain detailed transaction and valuation data on the universe of U.S. private equity- and venture capital-backed companies. Individual companies are aggregated to provide an industry level valuation of all U.S. private equity and venture capital companies (effectively creating industry benchmarks). This approach allows research indexes to reflect the gross returns of the industry, i.e., before the respective fund manager fees and expenses are deducted. Also, the research indexes are market-cap weighted.