May 2, 2013
Interviewed by: David Snow
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The ILPA Benchmark

Major institutional investors in private equity have a new benchmark –  the ILPA Private Markets Benchmark, launched in March 2013. Privcap’s David Snow asks Michael Elio of the Institutional Limited Partners Association and Andrea Auerbach of Cambridge Associates to explain what the ILPA benchmark is, and is not. Joining the conversation is Stefanie Langer, head of IR for the Independence Capital group of firms. This is the first of a four-part series that Privcap is offering in the second quarter of 2013.

Major institutional investors in private equity have a new benchmark –  the ILPA Private Markets Benchmark, launched in March 2013. Privcap’s David Snow asks Michael Elio of the Institutional Limited Partners Association and Andrea Auerbach of Cambridge Associates to explain what the ILPA benchmark is, and is not. Joining the conversation is Stefanie Langer, head of IR for the Independence Capital group of firms. This is the first of a four-part series that Privcap is offering in the second quarter of 2013.

The ILPA Benchmark
Private Equity Performance

David Snow, Privcap:

Michael and Andrea, recently your two organizations, the ILPA and Cambridge, announced the formation of a new benchmark that includes the information from ILPA members turned into an index that is then given back to the members to help better understand the private equity asset class. Can you talk about the benchmark and sort of what you learned about it and what the reaction has been from the market?

Michael Elio, ILPA:

Sure, sure. Well, just to set it straight, the benchmark is actually a subset of the overall Cambridge benchmark. So we went out to our members and got their portfolios, aggregated the list, and gave it to Cambridge, and they run their benchmark only with my institutional fund set. And that is what is sent to the ILPA, which we can distribute to our members.

And actually, it was a great exercise. When you think of what happens in the public markets, you don’t benchmark your public portfolio to the movement of the entire New York Stock Exchange. You choose the Dow 30 or the S&P 500. So the institutional benchmark providers like Cambridge, they have an incredible data set at this point.

So now institutional investors need to have that institutional subset to benchmark their portfolios—and working with Cambridge, we have put that together. And the results are interesting, actually. So far, what we’ve seen—we’ve done it for three quarters now—our medians tend to be slightly highly than the Cambridge medians. But our top quartiles tend to be slightly lower. So if you think of the band that institutional investors are investing in, it’s a little tighter, which is a testament to the skill of the institutional investing.

Andrea Auerbach, Cambridge Associates:

And it also makes the ILPA benchmark, as you said, the medians are slightly higher, so when managers come in to see us at Cambridge and our benchmarks are tough to beat, which we can quickly say, “Well, no, they’re not.”

Elio: Very true, actually. Ours is a little harder.

Snow: Since the announcement of the benchmark, what has been the reaction from the market? What kinds of calls have both of you been getting?

Elio: Well, I’ve gotten quite a few phone calls from a lot of members that had not yet contributed their lists and are now sending me their lists. We actually, though, I think it’s three to one general partners calling, asking about it—how it’s put together, how it’s comprised. And it’s been very well received.

Auerbach: We’ve been getting calls from GPs as well, asking, “We know we’re contributing to your benchmark, but we’d also like to hop over and be part of the ILPA benchmark.” And those are question, obviously, the ILPA is fielding in terms of “Are they in the data set or not?” But we’re definitely getting approached for wanting to be included in both sets of data. So we appreciate that, because building the strength of the Cambridge benchmark and the ILPA benchmark, it’s all to the good.

Elio: And it’s become a question that LPs are asking now when they’re sitting in front of their general partners: “Are you contributing to the Cambridge benchmark?” Because if they are and it’s an institutional fund of one of our members, it will be in the benchmark.

Snow: Stephanie, as an IR professional, do you have any questions for Cambridge or ILPA about this new benchmark?

Stefanie Langer, Member Firms of Independence Capital Partners:

Well, I think the natural corollary is something that Mike said, was: Will this benchmark be made available to GPs, whether they’re contributing or not?

Elio: Right now, it is not available to general partners. I will say it’s on the website that it is not, and I still get the questions anyway. [Correct as written?] Right now the goal was to produce an institutional benchmark, and we’ve done it. Cambridge has done a great job. We’re going to run that for a few quarters, and then we’ll see what we’ll do in the future.

Auerbach: But what I would say, given as Mike described it, the ILPA benchmark and the Cambridge private equity benchmarks are close enough. It’s a horse race, really, in terms of where we are trading places. Our U.S. private equity and U.S. venture capital benchmark books are on our website to the public.

And so managers that would like to get a sense, perhaps—not a complete sense, but a sense of maybe what the benchmarks might be looking like—can actually go to the Cambridge Associates website and pull it down.

Langer: I think this is a great partnership to be doing this and increasing transparency relative to benchmarking and accuracy, because clearly the general-partner community wants to be using benchmarks in their dialogues with potential investors and existing investors that are accurate. So I applaud your efforts in trying to bring some greater transparency to this particular effort.

Snow: So it sounds like the good news is that, at least according to the ILPA/Cambridge benchmark, the private equity asset class in general has done even better by way of median performance than other benchmarks might suggest. The downside is that for the average GP, now they’ve got a slightly higher hurdle to clear by way of performance.

Elio: Well, reality is we target top-quartile funds when you are investing, not median. So our top quartile is slightly lower, so there is a little more room in there for the general partners. But our goal eventually, when you think about it, is, we now know the universe between the funds that Cambridge has in their benchmark that are not on our institutional list. But then the remaining funds that my members are invested in, that’s our target list. So when you think about it, when we add those additional funds to the database, eventually Cambridge and ILPA will merge, because then the sample set will be almost identical.

 

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