Benchmark Private Market Funds in a Robust Multi-Asset Framework
XTAL benchmarks are rules-based indices, accurately representative of the economic reality of unlisted private market funds and, uniquely, conceived to be compliant with the EU Benchmark Regulation and IOSCO Principles for Financial Benchmarks.
XTAL Strategies anticipates that the adoption of the EU BMR standards will make the benchmarking tools currently available to private markets investors obsolete. This will leave current and prospective investors in the unlisted asset class without an underlying objective benchmarking reference. XTAL Private Market Benchmarks are filling that gap with compliant, transparent, accurate, and representative private market benchmarking.
XTAL Private Market Indices closely reference the narrative, widely used at XTAL, about the two brightest stars of the Constellation of the Centaurus, Alpha and Beta Centauri, that are known as the “Pointers” – the stars that navigators use to identify the Southern Cross and the south direction. While “navigating” among investment alternatives, to know where beta and alpha are is even more important – in particular, when this can provide early signal about portfolio valuations “heading south”.
The private markets were the only asset category not to have an unambiguous measure of their Beta (because traditional metrics do not allow additivity and accurate indexing), hence of proper Alpha – limiting the comprehension of all asset features, including yield. XTAL indices offer GPs, intermediaries and investors a groundbreaking and compliant framework to address this urgent need.
XTAL Private Market Benchmarks are rules-based and calculated daily according to a modification of the original Laspeyres index formula. They are based upon the groundbreaking and patented DARC methodology, a new paradigm to analyse and manage unlisted private market investments as if they were bonds.
A duration-based calculation framework ensures that XTAL Private Market Benchmarks compute private equity daily returns in the same time-weighted fashion of any other asset class, thus making unbiased pricing, proper benchmarking, and risk transfer in private markets possible.
XTAL Private Market Benchmarks reflect the true investors’ experience as they take into account the full capital commitment to the underlying buyout funds, reconciling on a daily basis the NAV of the constituent fund with the notional capital committed to the investment vehicle.
A regulated benchmark requires an underlying time-weighting methodology – XTAL uses its proprietary Duration adjusted Return on Capital (DARC) that has unique characteristics of compliance and consistency with the BMR regulation – applied on a stable reference amount (and not variable as it is the NAV).
An index would look like the red and light blue lines in the following chart, respectively the Asset Weighted (AW) and Equally Weighted (EW) indices for the USD Buyouts for the vintage 2014, compared with the S&P600 index (in dark blue).
For proper interpretation, the Buyout indices measure the appreciation of the total commitment. To gauge the NAV growth and calculate the period performance with the NAV specific initial amount (e.g., 65, rebased), to simplify one needs to reparametrize the index growth (say from 130 to 143, hence 13, i.e., 10%) on the vis-à-vis the rebased NAV and find that the period return is 13/65 = 20%.
This is the key difference with any other index currently available, with both the reconciliation with the underlying physical fund performance and the accurate comparability in diluted (on commitment) and undiluted (NAV) terms possible only with XTAL indices.