Asset returns of financial equities depend upon many factors that often get missed when looking at a single figure. These factors capture underlying relationships between economies and markets and the simultaneous change in asset prices. The list of factors includes, among others, interest rates, inflation, and economic growth. The best of analysts can find the effect of these relationships on current period returns. Pitchbook’s recent innovation does just that – they applied a factor-based framework to create a new Private Equity Barometer.
In addition to offering a single score that quantifies the state of the current return environment, Pitchbook’s barometer also offers:
- Insight into the market and economic exposures in aggregate PE returns.
- Insight into the drivers of current period returns by connecting them with key indicators.
- Insight on a monthly basis of private equity returns before quarterly fund returns are released.
Interestingly, Pitchbook creates with new private equity barometer using a simple linear regression that is simply a function of the indicators that passed the initial screening.
The Model
For technically inclined individuals, the model details, such as the signal, beta coefficients, and the 95% confidence level values may provide some interesting insight. The table follows.
On the macro level, Pitchbook’s barometer includes the National Activity Index, the Composite of Leading Indicators, Consumer Confidence, and Business Confidence. Each of these are estimated with their level effect and trend effect.
On the credit level, the model includes high yield spreads, lending standards, and a financial stress index.
Lastly, the model also includes an equity section, which comprises an implied equity volume measure and a small cap equity measure.
The Relationship
The development of the index would be useless if it didn’t connect to private equity returns. Luckily, according to Pitchbook, their new barometer index has a strong relationship with private equity returns, as shown by the following figure.
The figure has on the y-axis the standardized private equity returns and, on the x-axis, Pitchbook’s private equity barometer score. The relationship is strongly linear, suggesting that Pitchbook’s barometer may provide a leading indication of where returns will be reported at.
The Time Series View
The scatterplot view shows a healthy relationship. Pitchbook also released a time-series view. In the following figure, the blue line is Pitchbook’s private equity barometer, and the green line is the standardized private equity return values. Overall, the two move closely together, although interestingly, the most recent values have the private equity barometer a little weaker than the standardized private return measure.
Summing Up
Overall, in a new look at private equity data, Pitchbook’s new private equity barometer is a welcomed tool in gauging the state of private equity around the world.
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