There are four possible benchmarks for private equity:
- Client performance versus the appropriate market index (shown here as the S&P 500)
- Private equity industry (peer group) performance against the same market index
- Client performance versus competing investors
- Client performance versus the appropriate market index versus the performance of competing investors versus the same market index
Benchmarks 1 and 2 are calculated as shown in Long and Nickels 1996. Benchmark 4 is simply the difference between benchmark 1 and benchmark 2. Benchmarks 1, 2 and 4 require only client cash flow and valuation data, combined with readily available public market index performance data.
Benchmark 3, on the other hand, requires accurate, readily available return data for the private equity industry as a whole. In addition, benchmark 3 should be customized to reflect each investors risk/return/correlation profile (otherwise, the investors returns might be compared to the returns of investors who have taken much more risk to achieve them).