What is Benchmark?
A benchmark is the performance standard against which a fund's returns are measured. In private markets, common benchmarks include public indices (via PME), peer group medians from data providers like Cambridge Associates and Preqin, and the hurdle rate.
Benchmarking in private markets is complex because funds are illiquid and NAV-based rather than market-priced. Common approaches include: (1) comparing IRR and TVPI to peer vintage-year funds using data from Cambridge Associates, Preqin, or Burgiss; (2) public market equivalent (PME) analysis; and (3) absolute return hurdle rate comparisons.
LPs use benchmarks during due diligence to assess whether a manager's historical performance is genuinely strong or just reflective of favorable market conditions during that vintage.