Which benchmark should an LP use for a venture fund?

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Use more than one, and match each to the question you are asking. A vintage-year peer benchmark tells you how a fund compares with funds that started investing at the same time. A public market equivalent tells you whether the same cash flows would have done better in public markets. An absolute target tells you whether the fund met what your program needs. Each answers a different question, and none is reliable in a fund's first few years.

Vintage-year peer benchmarks

These compare funds that began investing in the same period, which controls for market conditions. They are the most common way to place a fund in quartiles. Check which universe the benchmark draws on, whether it is filtered by stage and geography, and how many funds are in the relevant vintage. A thin vintage makes quartile boundaries unstable.

Public market equivalents

A PME applies a fund's actual cash flows to a public index, so you can see whether committing to the fund beat the public alternative on the same timing. It is the clearest answer to whether venture earned its place in your portfolio. Choose the index deliberately, because a broad market index and a small-cap growth index can give very different answers.

Absolute targets

Your program may need a particular multiple or return to justify illiquidity. An absolute target keeps the conversation tied to your own objectives rather than to how other funds happened to do.

Why early rankings mislead

Cambridge Associates reports that funds need about six years to settle into their final quartile ranking. Early interim marks reflect valuation policy and the timing of a few rounds more than eventual outcomes. A Fund I that looks top quartile in year two, or bottom quartile, has told you relatively little. Read early performance alongside whether the manager is executing the plan they described.

Questions to ask the manager

  • Which benchmark do you report against, and why that one?
  • What universe, stage and geography filters does it use?
  • Do you report a PME, and against which index?
  • How do your valuation policies affect interim marks?

Related questions

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