I will restart writing on my blog with a statement about irrationality. Credit to Nassim Nicholas Taleb @nntaleb on X (https://twitter.com/nntaleb/status/1718990852628861003).
You must come to grips with the fact that history may, of all alternatives, take the most irrational path, that is, the one that makes the least amount of sense to educated & neutral observers.
Now, back to private equity.
I admit I am not coming to grips with the currently adopted valuation / benchmarking practices.
On the one hand, I hear that private equity valuation should not be (fully) affected by listed market volatility. Hence the “preference” for less volatile NAVs.
On the other, investors accept Public Market Equivalent (PME) methodologies for benchmarking. In other words, they apply full listed market volatility pricing on the random days of the cash flow and NAV events.
It looks that investors can accept as a rational investment strategy trading on the public markets on the days in which the cash flows of a private funds materialize.
Usually instead, if an investor decides to put capital at work in the public markets, there is usually a planned deployment strategy, e.g. full upront or periodic investments, an investment horizon and a disinvestment discipline.
This is different from a commitment in the private markets, where investments and divestments are at the discretion of a GP, who may even invest without calling capital or distribute cash without selling any portfolio holding, by leveraging the possibilities of the debt capital markets.
I can’t evidently come to grips with PME, beyond its nature of a purely theoretical, single-asset, simulation exercise. For a number of mathematical robustness reasons (relating to the aggregation flaws of money-weighted measures – incredibly overlooked), its results can’t be generalised.
I have addressed the topic already in the past in a detailed post: https://blogs.cfainstitute.org/investor/2021/07/05/pointless-market-equivalence-if-not-the-irr-why-the-pme/.
Rationally, benchmarking private equity with PME keeps looking irrational.
The DARC Room 