Morningstar, Inc. this week introduced the Morningstar PitchBook Buyout Replication Index, representing a portfolio of public companies designed to exhibit a similar risk and return profile as companies targeted by buyout managers.
The Morningstar Pitchbook Buyout Replication Index tracks publicly traded small- and mid-cap stocks that resemble companies in private equity buyout funds. The index is underpinned by PitchBook’s data on buyout funds and transactions and uses machine learning for constituent selection.
“Our new index aims to replicate returns from private equity buyout funds with the transparency and liquidity of the public markets. It’s a powerful combination of PitchBook’s data and Morningstar Indexes’ expertise, representing a unique slice of the market,” says Sanjay Arya, head of Innovation at Morningstar Indexes.
“Private equity firms customarily attribute their performance to operational alpha, but our research found that for many private equity funds, leverage, valuation shifts, and sector selection are actually the primary performance drivers,” added Andrew Akers, lead quantitative research analyst at PitchBook. “The Morningstar PitchBook Buyout Replication Index was created to capture these factors systematically and provide a much-needed and realistic benchmark for the private equity industry. As the private markets continue to grow in prominence and accessibility, we’ll continue building a suite of tools to help our clients understand GP strategies and performance analytics.”
Other key features of the Morningstar PitchBook Buyout Replication Index include:
- Private equity-like returns with liquidity: Tracks public equities with characteristics favored by buyout funds, enabling investors to access private equity-like exposure without the high entry costs, capital commitments, or lock-up periods typical of traditional private equity strategies.
- AI-driven innovation: A neural network identifies public companies with take-private characteristics such as strong free cash flows and stable margins.
- Captures the distinct features of buyout portfolios: Mirrors the sector and leverage profiles of private equity portfolios to deliver exposure that is comparable to private equity.
- Addresses return smoothing with greater transparency: Provides visibility into constituents and daily marked-to-market updates to mitigate delays in private fund reporting and reflect the risk profile of the private equity asset class.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news. She is originally from Queens, New York, but now resides in Denver, Colorado.
