Higher frequency private equities data, like that produced by privateMetrics via its market indices, provides a dynamic view of the private equities market. Pricing at the asset level monthly, one has a current view on how market participants are pricing risk in the market. Alongside more reasonable volatility assumptions, this can be used to form longer term expected return assumptions. For correlations, a longer term perspective may be more appropriate given there is an interaction among various asset classes.

Rolling and Horizon Correlations in Private Equity

Long term price level correlations between the private2000 index, S&P 500 and Russell 2000 indices are high (~0.9). However, price return correlations between private and public equity returns are time varying and can change sign, understating long-term relationship between these asset classes. Analyses using the private2000 index show that 12-month rolling correlations with the S&P 500 and Russell 2000 fluctuate significantly, falling during periods of large drawdowns in listed equities (2018, 2020, 2022). However, as the measurement window extends to 24 or 36 months, and especially when horizon-based (multi-quarter hold period) returns are examined, aligning with private equity investments horizons, correlations rise toward 0.4 to 0.6.

Short Term Volatility and Correlations Matter

While long term horizons are important for understanding correlations among asset classes, short term, higher frequency data is essential to understand private markets and track the current performance, value and riskiness of private asset portfolios. Recently, lower fund distributions and a slowdown in exits have pushed some limited partners to sell or explore sales on the secondary market, where there are significant discounts to reported NAVs. This has called into question the idea that private equity investors can ignore the short term. Given the high cost of transacting in the secondary markets, investors need to have a current view on the price their private assets may transact at, not just the NAVs. With the development of continuation vehicles and evergreen structures, the ability to take both a short and a long term view is key and privateMetrics® can help investors understand these dynamics by capturing and incorporating the latest deal metrics in monthly pricing.

Long Term vs Short Term

Rolling monthly and quarterly correlations between the private2000 index and listed equities’ indices ranges from 0.3 to 0.4. Hold period correlations, which measure returns over horizons consistent with private equity ownership, show levels closer to 0.6, even approaching 0.8 at some points. The lower shorter term correlations indicate that the markets are different and one cannot be effectively proxied with the other. Naturally, at longer horizons (hold periods), the correlations increase, reflecting that both are still ‘equities’ and thus influenced by similar fundamentals. With correlations well below 1, the case for diversification still exists, but less than that implied with shorter term rolling correlations. Moreover, the disconnect in the shorter term highlights the need for reliable private equities’ data as listed equities can diverge from unlisted equities in the short and medium term. This is where data is most needed, for benchmarking, valuations, and understanding the private equities’ current market dynamics.