Overcoming performance measurement challenges in private markets

Private market allocations have grown from a niche strategy into a core driver of portfolio returns, yet many performance frameworks still treat them as an exception. As private markets become a larger component of portfolios, they can no longer sit outside mainstream performance processes.

Investment teams are making increasingly important decisions in assets that are inherently more difficult to value, benchmark and explain, making robust performance measurement and attribution more critical than ever. As allocations continue to rise, the challenge is no longer simply measuring performance but understanding whether investment decisions are creating value. Addressing these challenges requires a more robust approach to measuring and attributing performance across private assets-related decisions, with greater consistency, transparency and insight into what is driving returns.

The timing gap in private market performance

Performance teams are expected to provide timely insights and support daily investment decisions, yet private market data often arrives weeks or months later. Quarterly or otherwise infrequent valuations can create a significant disconnect between the information available when decisions are made and the final data used to assess performance.

This is particularly relevant when comparing the data used to make total fund-level decisions (usually based on estimates) with the data used to evaluate those decisions retrospectively (effected-dated valuations). When evaluating fund-level decisions such as currency hedging, rebalancing and asset allocation, valuation estimates need to be used for private market data. The timing of valuations can therefore influence both decisions and their reported outcomes, with the potential impact becoming more significant as private market allocations grow.

Addressing this requires performance solutions that can measure the effect of valuation timing; that is, comparing decisions made using best available data at the time against outcomes based on final data and automatically incorporate backdated valuations as they become available.

The impact of private asset illiquidity on strategic asset allocation

Illiquidity means investors cannot always implement their desired asset allocation when they want to. Large transaction sizes, limited deal availability, and the difficulty of exiting prematurely from existing investments can create a gap between strategic allocation targets and the allocations that are actually implemented.

To manage these exposure gaps, asset owners may use listed proxies or other interim solutions, but these can introduce additional performance and attribution effects. As private market allocations grow, understanding and measuring this implementation drift becomes increasingly important. This requires a framework that separates strategic asset allocation decisions from the practical constraints of implementing them, allowing the impact of illiquidity, proxy exposures and implementation drift to be measured explicitly rather than becoming embedded within broader allocation effects.

Understanding what drives private market returns

Understanding the key drivers of return is nuanced for each different private asset class, and while portfolio IRR provides a measure of overall investment performance, it does not necessarily explain whether the individual investment decisions behind those outcomes were effective.

Taking private equity as one example, investment committees need to understand which vintage years added value, which managers generated alpha, and which strategies performed best. They also need to distinguish between outperformance driven by investment skill and returns generated by broader market conditions, as well as understand how much value came from manager selection versus allocation decisions.

This requires analytics that can decompose private market returns into decision-level effects, attribute performance to commitment decisions across vintage years, strategies and managers, and compare outcomes against relevant private market universes rather than relying solely on portfolio-level IRRs.

Selecting an effective benchmark for private markets

One of the biggest challenges in measuring private market performance is determining what success should be measured against. Additionally, the choice of an effective benchmark for private markets can vary depending on whether private assets are evaluated in isolation or in a broader total fund added value context. Absolute benchmarks such as CPI+X% or cash plus a spread are easy to communicate but often fail to reflect the market conditions and opportunities available when an investment was made.

Similarly, vintages raised in different market environments cannot always be compared on a like-for-like basis. Public Market Equivalent (PME) approaches provide useful perspectives but also have limitations, making peer groups and manager universes increasingly important for evaluating performance in context.

Asset owners need benchmarks that better reflect the risk, opportunity cost and illiquidity associated with private market allocations. Effective performance measurement should therefore support multiple benchmarking approaches, enable analysis using PME and alternative PME methodologies, and separately evaluate the impact of vintage year, manager selection decisions and the opportunity cost of allocating capital to private markets.

Connecting private market performance to total-fund performance

As private market allocations continue to grow, so too does the need for performance measurement to adapt to the complexity and characteristics of these investments. Effective measurement requires more than simply reporting returns; it means understanding the impact of delayed valuations, quantifying the cost of illiquidity, applying appropriate benchmarks, and identifying which investment decisions have created value.

Most importantly, private market performance needs to be considered alongside the performance of other asset classes, giving investment teams and committees a clearer view of how these investments are contributing to total-fund results.

These challenges are equally relevant under a Total Portfolio Approach, where capital is allocated across the whole portfolio rather than within asset class silos. By addressing these challenges, asset owners can transform private market data from a historical reporting requirement into a decision-making tool, enabling more informed capital allocation decisions across the entire portfolio.