Key Points
- Barry Griffiths’ “direct alpha” methodology compares private market investment returns with public equity benchmarks to clarify actual performance.
- Private equity assets totaled $10.6 trillion in 2023 and may reach $25.1 trillion by 2033, intensifying the need for transparent metrics.
- Major funds, such as Japan’s GPIF and Norway’s Norges Bank, use direct alpha to understand their private investments better.
- Griffiths’ 2023 study shows buyout funds yielded an adjusted 3.1% over general market benchmarks.
Wall Street’s private markets are under increasing pressure as high borrowing costs impact returns, exit strategies falter, and regulatory scrutiny mounts. A critical challenge remains in effectively assessing performance—a task that Barry Griffiths, a quantitative analyst, has tackled with an innovative approach. Griffiths’ “direct alpha” methodology aims to clarify private market performance by comparing it with public equities. It offers investors insights typically obscured in traditional assessments of private investments like buyout funds and venture capital.
The industry is known for its opaque valuations, often relying on internal performance measures that can be subjective and may not account for broader market conditions. Griffiths, a former head quant at Ares Management, and his peers believe direct alpha could provide an accurate performance measure, tracking private investments against comparable public benchmarks, such as the S&P 500. Direct alpha calculates how private market cash flows—contributions and distributions—might have performed if invested in a similar public asset over the same period. It offers a way to determine true added value.
Griffiths and collaborators’ recent findings highlight the potential of direct alpha to reshape private equity analysis. A study of over 2,400 buyout funds found an internal rate of return (IRR) averaging 12.3%. Yet, after using direct alpha, their analysis revealed an average outperformance of just 3.1% over a general market benchmark and 1.7% compared to industry-specific indexes. Venture capital fared less favorably, showing no additional return after adjusting for public equity performance in similar industries.
This quantitative lens has garnered attention from influential institutions, including Japan’s Government Pension Investment Fund and Norway’s Norges Bank Investment Management, both of which employ forms of direct alpha in their asset evaluations. However, the approach isn’t without contention; private equity managers, often rewarded based on absolute returns, might resist metrics that diminish perceived performance.
The adoption of transparency tools continues, with some of Wall Street’s largest firms investing in alternative data providers to help bridge the knowledge gap between public and private assets. Yet, challenges remain in standardizing these assessments in an industry where reporting timelines, fund structures, and valuation frequencies differ widely.
As the private equity space expands—with assets projected to hit $25.1 trillion by 2033—the industry is slowly embracing more rigorous analyses, indicating a shift toward accountability and alignment with investor expectations.
