Rethinking How Large Investors Benchmark Private Markets

By: Peter Grant, Mercer

Large pension systems should move beyond evaluating private markets solely against public market benchmarks and incorporate peer-based and PME benchmarking to better assess manager skill, portfolio construction and governance effectiveness. A multi-benchmark approach can strengthen oversight, accountability, and stakeholder reporting while also enabling greater accuracy in fiduciary analysis.

For large pension systems, private markets are no longer a tactical sleeve; they are a structural source of return, diversification, and long-term funding support. Yet many plans still evaluate private equity, private credit, and other illiquid assets primarily against a public market index plus a spread. That approach remains useful for testing whether private markets have earned an illiquidity premium, but it often says too little about manager selection, portfolio construction, and governance effectiveness. As peer private market data improves, public plans have an opportunity to modernize benchmarking in ways that are more relevant to how private portfolios are actually built and overseen.

Why This Matters for Large Pension Systems

• Clearer oversight for boards and investment committees: Peer-based benchmarks can reduce the noise created when public markets swing sharply quarter to quarter, helping fiduciaries distinguish market volatility from genuine implementation skill.
• Better alignment of incentives: Comparing private teams only to public markets can obscure whether value came from asset allocation, manager selection, or timing. A broader framework supports fairer assessment of staff and external managers.
• More credible stakeholder reporting: Plans face scrutiny from trustees, beneficiaries, and policymakers. Benchmarking that reflects private market realities can strengthen attribution, reporting quality, and confidence in decision-making.

What Leading Pension Systems Should Consider

Leading pension systems should define the role of each benchmark clearly. Market plus spread helps answer whether private markets outperformed public opportunity cost. Public Market Equivalent helps test value creation after matching actual cash-flow timing. Peer private market universes help assess relative manager skill, portfolio construction, and competitive standing. Used together, these measures can give boards a more complete view of both asset-class value and implementation quality.

Governance Questions to Resolve Early

• Which data provider best matches the program’s size, strategy mix, and governance needs.
• Whether reporting will be frozen or restated as new data arrives.
• How vintages will be weighted, including commitment, paid-in capital, equal-weight, or market-value approaches.
• Whether historical results should be restated or the new framework adopted prospectively.

Bottom Line

For large pension systems, better benchmarking is about more than measurement. It can improve oversight, strengthen accountability, and help boards evaluate whether their private market program is delivering both competitive returns and implementation skill. Plans that test peer private market benchmarks alongside existing methods can move toward a more informative, decision-useful framework without losing sight of the fundamental question every fiduciary must answer: is the portfolio creating durable value for beneficiaries?

For additional details on how other large asset owners have implemented these benchmarking approaches, please contact Peter Grant at peter.d.grant@mercer.com.

Peter D. Grant, CFA, is the Public Sector Commercial Leader at Mercer, helping investors address complicated investment challenges.