With the weak perceived performance of private equities, many pension plans’ private equities returns are lagging materially behind public market proxies. This suggests either across the board underperformance – or – that the benchmark choices may be incorrect.

The evidence across ten US public pension plans makes clear that current benchmarking practices for private equity fail to reflect the private equities market, defeating the purpose of the benchmark. Comparing these outcomes to listed equity indices like the S&P 500 or Russell 3000 produces misleading signals and may impact asset allocation decisions.

The structural differences between public markets and private equity portfolios—company size, valuation multiples, and the speed of price adjustments—mean that listed benchmarks are not reflective of private equities’ characteristics.

Fund manager benchmarks introduce other issues, including significant reporting lags, smoothed valuations, and a mix of systematic risk and manager skill. By contrast, the private2000® index, by capturing systematic risk, pricing monthly, and updating for recent transactions, better reflects the return environment and provides more insight into manager and plan private equity performance.

For trustees, beneficiaries, and policymakers, the lesson is straightforward: if benchmarking is meant to be a tool for performance measurement and decision-making, it must reflect the market in which the assets are actually invested. Adopting asset level private equities benchmarks would reduce confusion, align the private equity portfolio with a private equities benchmark, and ultimately improve asset allocation and performance discussions.