In a newly released publication, “Private Equity & Infrastructure Fund Selection and Alpha Tracking”, Scientific Infra & Private Assets (SIPA) has presented an approach to measure and track the alpha of private market funds, allowing robust and representative fund selection and monitoring.

The approach uses the Direct Alpha method, which allows investors to assess the performance of each fund and manager fairly against a representative benchmark. SIPA calculates a private market equivalent return for a private equity or infrastructure fund. With this approach, investors gain actual insights into the excess returns (or alpha) generated by a given fund. This alpha measure can be compared directly across funds, facilitating an objective and unbiased decision-making process for fund selection and monitoring.

Additionally, this method supports the ongoing monitoring of fund investments and enables meaningful engagement with managers to understand the sources of return in private asset strategies.

In the example below, while both funds appear to have outperformed public markets, only Fund 2 has been able to generate alpha against the representative private market benchmark.

• Fund 1 has delivered an IRR of 17.64% but underperformed the market with an alpha of -0.61%. Fund allocation resulted in small positive alpha but was offset by underperforming investments.
• Fund 2 has delivered an IRR of 21.37% and outperformed with an alpha of 4.81%. Primarily driven by superior investment selection by the manager.

Abhishek Gupta, Associate Director – Solutions with SIPA, commented, “The SIPA approach allows funds to be ranked by market outperformance on a consistent and directly comparable basis so that the best strategies and managers can be either selected or re-invested in. It also allows the value-add created by the manager’s allocation choices (segment or factor tilts) to be differentiated from that created by selecting individual assets and operational improvements.”

Download the full press release here.