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Indexing Private Equity

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What Makes an Index?

A Discussion of Benchmark Criteria

An index used to benchmark any asset class (public or private) should ideally meet six specific criteria*. Although we believe no benchmark for private equity can conform precisely to these criteria we think the Sand Hill Index gets as close as possible.

CRITERIA	The Sand Hill Index of Venture
Measurable
"The benchmark's return can be calculated over the time span of the investment management contract."	The Sand Hill Index of Venture is calculated quarterly for periods from 1989 to present, and so is measurable. Returns for any intermediate time span can be calculated.
Investable
"The investor (principal) can invest directly in the benchmark index as an alternative to hiring the investment manager (agent)." This criterion is based on the idea that performance evaluation should measure incremental value added.	Managers of private equity portfolios often cite fund access as a problem. The non-investability of an asset class need not inhibit the development and application of an index to gauge a portfolio's incremental value added. Our database comprises close to 100% of the universe of privately-held C-corporations that have received institutional venture funding and is a good representation of the venture asset class as a whole. Because our database is substantially complete and held at the company-level, an appropriate benchmark can be easily created, whether defined as the average performance of all of venture capital or a custom-built subset that more accurately reflects the part of the market you focus on or have access to.
No Forced Bet
"The investment manager will never be forced to place a bet against the benchmark index."	Private equity fund managers (GP's) cannot purchase the benchmark the way public fund managers can the S&P 500. Although private equity managers can in principle purchase close proxies to any company, by definition the funded companies are trying to differentiate themselves in some manner. Therefore any private equity benchmark will fall short of complying with this criteria.
Appropriate
"The benchmark reflects the investment manager's style or specialization."	A benchmark built from company-level data can reflect any investment style or specialization desired.
Non-Manipulable
"The manager should not be able to directly influence the performance of the benchmark to any significant degree."	A custom benchmark built from our database can exclude from the calculation any fund manager’s own holdings or an equal percentage ownership stake in such holdings.
Specifiable in Advance
"The benchmark is constructed and mutually agreed upon between the manager and the client at the outset of the management contract."	This criterion can be implemented by previous agreement with Sand Hill.
*These criteria were extracted from "Benchmarks & Index Needs in the U.S. Private Real Estate Investment Industry: Trying to Close the Gap", D. Geltner, D. Ling. Final Report, October 17, 2000.

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