(Bloomberg) -- Times are tough in private markets.
High borrowing costs are hurting returns, managers are struggling to exit investments, and regulators are circling.
All that is bringing back an issue that has long haunted these opaque holdings:
No one is quite sure how to actually measure their performance.
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Private equity commanded $10.6 trillion in 2023 and is expected to grow to $25.1 trillion by 2033, according to estimates from Bain & Co.
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Alpha—a measure of a portfolio manager’s returns on top of the broader market—is a familiar concept in finance. It’s become a common tool in equities, where indexes such as the S&P 500 provide an obvious benchmark for performance. A huge amount of capital shifted into low-cost, passively managed funds at the expense of human stockpickers after it became clear that few managers consistently achieve alpha. It takes far fancier statistical footwork to do anything similar in private markets, where valuations are infrequent and largely decided by the managers of funds.
Private investments have cash flows that can be measured. But since every fund takes in money and pays it back at different times, it’s hard to truly understand performance.
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