Factor Benchmarking for Private Capital Funds

When you want a healthy body, you need to know what you eat. Therefore, to better understand your diet, you check the nutrition statistics of the groceries you buy. When analyzing your private capital portfolio, this concept can be applied in a similar way: For a healthy portfolio, you need to know what drives your performance. According to this analogy, you check your portfolio’s factor exposure to understand its underlying return ingredients (= components = factors).

Our **Factor Benchmark module** shows you the public components (= ingredients = factors) of your private portfolio returns.
This enables you to identify a more suitable public market benchmark than just the MSCI World index (or any other broad public market index).
Thus, our Factor Benchmark module is a more sophisticated version of traditional Public Market Equivalent (PME) benchmarking, as it incorporates additional non-diversifiable risk factors.

In turn, if you just use the MSCI World as benchmark, you implicitly assume a market beta factor of one and neglect all other potential risk factors. Our Factor Benchmark module goes beyond that and reveals the public performance and risk drivers that are usually hidden from you.

Our factor model follows a linear multi-factor model

is the expected private equity return, is the risk-free rate, is the beta factor for the th factor, and is the expected return of the th factor.

In our case, we regard the Market Excess Return, the Size Factor, the Value Factor, the Quality Factor, and the High Dividend Yield Factor as potential risk factors that can explain your private portfolio return {}.

To determine your portfolio’s beta coefficients, we select the factor exposure that best describes your observed portfolio cash flows from a pre-calculated coefficient ensemble (that has been estimated on a broad private capital dataset).

which is just a simple extension of the famous Capital Asset Pricing Model (CAPM) formula.

is the expected private equity return, is the risk-free rate, is the beta factor for the th factor, and is the expected return of the th factor.

In our case, we regard the Market Excess Return, the Size Factor, the Value Factor, the Quality Factor, and the High Dividend Yield Factor as potential risk factors that can explain your private portfolio return {}.

To determine your portfolio’s beta coefficients, we select the factor exposure that best describes your observed portfolio cash flows from a pre-calculated coefficient ensemble (that has been estimated on a broad private capital dataset).

Having a closer look at our **Factor Benchmark module**, it can be **broken down in three parts**:

**1) Factor Exposure.** The Factor Exposure table shows you which public factor exposure best explains the cash flow profile of your private capital portfolio (and sub-portfolios).

Figure 1: Extract of the Factor Exposure table

Figure 1 lists the factor values for an exemplary portfolio. It can be read as follows: A “Risk-Free Rate” builds up the baseline; therefore, its coefficient is always 1. The “Market – Risk-Free Rate” value of 1.27 shows that this portfolio is located 0.27 above the market beta of 1. For the following four factors (“Size”, “Value”, “Quality”, and “High Dividend Yield”), figure 2 exhibits their construction via a long and a short position.

**2) Factor Explanation**

Figure 2: Extract of the Factor Explanation table

The above stated “Size Factor” value of 0.14 (cf. figure 1) indicates that your portfolio positively trends towards the MSCI Small Cap (cf. figure 2). The negative “Value Factor” of -0.30 means that your portfolio return is better described by the MSCI Growth than by the MSCI Value. The same logic holds for the “Quality Factor” and “High Dividend Yield Factor”.

Our full Factor Explanation table also gives you concrete figures on public market returns of the last x years (in this example 5, 10, and 15 years).

In addition, the **3) Factor Return Decomposition** visually breaks up the return contributions of each factor in different time periods. Here, the beta coefficients from figure 1 are multiplied by the corresponding realized returns from figure 2.

Figure 3: Extract of the Factor Return Decomposition Chart

In the example from Figure 3, we see that the “Market – Risk-Free Rate” factor accounts for about half (50.82%) of the realized return within the last five years. The second most important factor is “Value” which accounts for about one quarter (25.91%) of the realized return in this period. In this specific example, the “High Dividend Yield” factor exposure actually lowered the realized return by a small amount (-2.14%). In this context, it is important to keep in mind that the chart shows return proportions which add up to 100% to better highlight the relative factor importance.

Our solution is flexibly adjustable and can be customized to your needs. For example, we can perform the analysis also on segments of your private capital portfolio, i.e., different groupings according to Fund of Funds, Regions, Programs, etc.

AssetMetrix’s Factor Benchmarking module enables you to enhance your decision-making by providing a sophisticated public benchmarking metric accessible for your private capital portfolio considerations.

To learn more about our benchmarking solutions, please request a demo!

**About AssetMetrix**

AssetMetrix is Europe’s leading next generation asset servicer. We offer modular outsourcing solutions for private capital investors: front-, middle- and back-office solutions for Limited Partners and General Partners.

Our services enable private capital investors to free up their own resources for making investment decisions, benefit from our secure IT system and state-of-the-art analytics, and increase in-house transparency for optimal decision-making.

AssetMetrix has more than 20 years of experience as a service provider in institutional capital investment and operates without conflicts of interest. AssetMetrix is not an investor, an investment consultant, or a placement agent, but currently administers portfolios with a total volume of over €12 billion and more than 1500 funds.

**Christian Tausch**

Analytics

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**Dr. Philipp Abel**

Product Development

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