Benchmarks for assessing the performance of private market assets leave much to be desired, industry insiders said, prompting institutional asset owners to tweak or even overhaul existing benchmarks to better reflect their evolving portfolios.
"Of all of the illiquid markets, the only one with a reasonable benchmark currently is real estate," said Allan Emkin, Los Angeles-based managing principal at Meketa Investment Group Inc.
"Here, (in real estate) there's a large number of open-end commingled funds that offer quarterly liquidity and — because of this — have their assets appraised frequently. There are abundant market comparables for most institutional properties," he said.
Alternative investments are long-lived and for that reason are infrequently bought and sold, which makes them difficult to measure, industry insiders said. Investors do not really know the value of an investment until there is a transaction, they noted.
The benchmark topic has become
more urgent as capital continues to flow into the alternative investment asset classes. Alternative investment assets worldwide under management totaled $5.8 trillion as of June 30, an all-time high, up 12% from $5.2 trillion as of Dec. 31, 2017, and $2.3 billion as of Dec. 31, 2008, according to McKinsey & Co.'s private capital report released in February.
While benchmarking for private equity is improving, it still has a long way to go, Mr. Emkin said. "Private market natural resources and infrastructure benchmarks, in particular, tend to be far less robust."
Appraisals for certain unique assets such as airports are more challenging because they are priced less frequently, so it's harder to know what they're worth, he said.