XTAL Strategies was launched by industry veterans to uncover new ways in which to expand the private markets message. But, what common headwinds stand in the way?
Can private markets investments be analysed and managed as if they were bonds?
Yes, they can, according to Massimiliano Saccone, former global head of multi-alternatives strategies at AIG Investments (PineBridge) and Aureliano Gentilini, former global and European head of research at STOXX and Lipper, who have recently launched fintech XTAL Strategies operating in London and Milan.
In an interview with Citywire, the pair reveal how they intend to unlock new ways to access and trade the private markets.
They also explain how their new platform works and how they aim to solve the private market performance and risk measurement puzzle by adding transparency and liquidity to the industry without compromising the fundamental characteristics of the asset class.
They also explain why the new EU benchmark regulation entering into force in January 2022 can be a turning point for investors and general partners.
What are the biggest challenges when evaluating private markets investments?
All the evaluation problems in private markets stem from the lack of traded prices for investments. Investors have to refer to periodic, often delayed, NAV reports. At the same time, investors have difficulties comparing their results within the asset class and versus all other asset classes.
This is a structural feature of the private markets, which are both non-traded and rely on the dynamics of cash-flows and NAVs, which require interim fair-valuation assessment, exposed to subjectivity, before being liquidated over time.
The challenges in private market evaluation refer to both timeliness, availability and accuracy of primary data and the metrics traditionally used to measure and benchmark performance, which cannot be properly averaged, hence preventing any use beyond single asset assessment.
The current metrics are money-weighted (IRR and multiples) in contrast to the time weighted metrics of all other asset classes (and interest rates on mortgages) and generate confusing information for an audience of non-specialists, including non-private equity senior staff and key stakeholders at large investors.
Money-weighted metrics are often misrepresented as annualised rates of return but, indeed, they do not represent the actual growth of the capital committed over time.
Furthermore, they neither enable the comparison of private equity returns with the performance of other asset classes on an apple-to-apple basis nor properly measure and represent, through the standard logic of compounding, the underlying physical assets. Also, other available tools like the PME are relative return measures that cannot be generalised.
All this means that private market investors are left with no metrics for proper comparison of returns and no statistics for risk.
And those are exactly the challenges that XTAL has tackled. Daily valuation and pricing required for accurate benchmarking can only be achieved using a robust methodological approach in accordance with time-weighted performance measurement standards and sound nowcasting techniques.
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