Beyond top quartile: what deal-level benchmarking unlocks for private market investors

Michael Venne: Welcome to RPM, the Stepstone Group podcast that delivers quick takes and sharp insights on the themes and trends shaping private markets. I'm your host, Michael Venn. Today we're tackling something that sits underneath almost every conversation in this industry, but rarely gets a podcast of its own. Of course, I'm talking about data, specifically how we measure performance in a market where data has historically been fragmented across sources, inconsistent in its definitions.

Tyler Johnson: Great. And just building on Paul's comments on the GP use case, right? Certainly valuable from an investor relations and fundraising use case, but it's also valuable from a deal underwriting use case as well, just as a way of understanding performance trends and trends across operating valuation metrics across very granular cuts of the private market universe. Right.

So for example, you can isolate particular industries or sub-industries. Michael Venne: That's it for this episode of RPM. To go deeper on what we covered today, links to Spy By Stepstone and Pitchbook are both linked in the show notes. And if you're an LP or GP trying to figure out where you sit on the curve, well, that's exactly the question this partnership was built to help you answer.

If you like this episode, the best thing you can do is share it with one person in your network who would find it useful. And subscribe wherever you get your podcast. I'm Michael Venn. Thank you for listening.

Top quartile, two words that have raised billions of dollars in private markets. Two words that have built careers, won mandates, and justified fees for decades. But there's an uncomfortable question that few like to ask out loud. Top quartile compared to what?

In public markets, you can answer that in a second. In private markets, the answer has always depended on which data set you had, what definitions it used, and how recently it was reported. Now, Tyler Johnson: and effectively leverage our very large database of private transaction comms to understand things like purchase price multiples, leverage multiples, margins, et cetera, ⁓ within private markets. Michael Venne: And slow to reach the people who need it.

I'm joined by two people who think about this every day. Tyler Johnson is a partner and chief technology officer at Stepstone and one of the architects of SPY. And joining him is Paul Santarelli, the Chief Solutions Officer at Pitchbook, whose team you've almost certainly relied on if you've ever tried to make sense of a private deal. Tyler, Paul, welcome to RPM.

And we'll see you next time on RPM. That's starting to change. The deal level benchmarks that Stepstone has built over the years are now broadening out. We've just made them available into PitchBooks platform, thereby integrating them into an environment where many in the industry already work.

And today we're gonna talk about why that matters and what happens next. Tyler Johnson: Thanks for having me. Paul Santarelli: Thanks for having me, Michael. Michael Venne: So I know we're all excited to talk about the new partnership and the new product, but before we go there, I want to lead with the problem, specifically why benchmarking in private markets has been so challenging.

Paul, I'm going to start with you. From your seat across the broader market, what's the state of benchmarking today and where do users hit a wall? Paul Santarelli: Yeah, I mean, I've think about historically how benchmarking works, and it's always been, especially in the private capital markets, done at the fund level, which historically is has been very good. It tells you how, excuse me, a fund manager has ranked, but it doesn't necessarily tell you how they got to those returns.

⁓ is it from picking the right strategy? Is it picking the right sector? Was it one individual deal that drove the entire fund? Or was it a series of singles and doubles that drove the fund?

And that has been a challenge forever in how GPs tell their story and how LPs evaluate funds across ⁓ different potential managers. Michael Venne: And Tyler, ⁓ follow up to you, what makes private market benchmarking structurally different from public markets? Is it the liquidity, reporting cadence, something else? Tyler Johnson: So I'd say the single biggest difference, right, and and maybe the most obvious is that in public markets the the data is generally publicly accessible, right?

You can you can access the performance and operating metrics of publicly traded companies and access that data on the entire universe, right? ⁓ but in private markets, simply not the case, right? No one, in fact, actually has the entire universe. And different providers like like us, right, have been able to aggregate ⁓ data on some of the universe to derive some sort of insight on that.

But again, no one has it. Now there's a couple different sources ⁓ of how different firms can aggregate this data. We we source that data by being ⁓ one of the largest allocators in private markets. So ⁓ from our advisory asset management and data services, we're able to aggregate and consolidate this data to give a view on private markets.

But again, no one has everything and that's one of the major challenges that we have here in private markets. In addition to that, how the data is shared in private markets is still pretty archaic, right? It's ⁓ different managers sharing their information through PDF documents that ⁓ investors effectively have to parse and gather that data, extract it, review it, consolidate it, clean it. And that data comes typically two, three, and sometimes even four months lagged.

Right. So investors effectively have to use technology to parse that data quickly to drive any sort of timely insight from that data in private markets. Michael Venne: ⁓ when a GP says top quartile, which is something we hear a lot, what's actually behind that claim and w why does that pose any problems? And Paul, why don't why don't you take that one?

Paul Santarelli: Yeah, I mean, you know, top quartile of what? Right? ⁓ the manner in which a GP can define their peer group, the manager, the the the manner in which they can define who they want to compare against. ⁓ you can do that in a lot of different ways.

⁓ there are historical benchmarks and certainly there are top level benchmarks that have been provided by many providers, including us, over the years. ⁓ they tell a story, ⁓ but it doesn't allow a GP to really tell their own story. And I think that's One of things that we've always tried to bring to the market at Pitchbook is an understanding of how you compose a peer group in the first place so that you can say, Hey, what are we doing as a firm? What is our investment thesis?

What strategy are we deploying? And how can I find similar firms that are doing something the same or at least ⁓ adjacent so that when we go to an investor and we're looking to an LP to to raise capital, that we can tell our story better. ⁓ and I think that, you know, going back to your question on the wall. That still ends up being a fund to fund comparison at the returns level.

And this partnership that we have been able to create and the data that Stepstone has been able to ⁓ collect over the years allows us to take that story down a level, right? And really understand what are those drivers that are happening within the fund? What are the deals that are happening? What are the details on those deals so that a GP can more effectively say to their investor, how did we create value?

⁓ in our portfolio so you understand what you're getting when you're investing with us. ⁓ And that's been a huge, huge thing that we have been hearing from RGP clients for years. We want a better way to tell our story. We want a better way to be able to show how we drive value creation.

And without that underlying deal level benchmarking that the the Stepstone Group has been able to collect and clean as as Tyler mentioned over the years. It just hasn't been possible before. ⁓ so now in conjunction with being able to really understand the different strategies the GPs are ⁓ deploying and then being able to tell that story at a more granular level, it really changes the dynamic in how do we get to say, Hey, we're a top performing fund, right? We can really define that ⁓ and bring more transparency to the LPs, to the investors when they're in selection and for the GPs to tell their story.

Michael Venne: Glad you jumped right into the next topic, which is of course like what this partnership unlocked. ⁓ you preempted one of my questions when when you discussed things that GP specifically were asking you. Were there any other asks that you were getting from other pitchbook users that ⁓ get resolved with this partnership and the deal-level benchmarking that we are ⁓ making more broadly accessible? Paul Santarelli: Yeah, I mean, to to to to frame the answer to that question, Pitchbook serves a lot of different types of clients.

⁓ so we have clients across the private capital market spectrum, investment banks, GPs, LPs, ⁓ a lot of service providers who service deals or service funds in the space. ⁓ and the underlying theme is always how do I understand what is going on in this market better? Private capital is an inherently an opaque asset class. We try to bring a lot of transparency so that people can make better decisions depending on what services they were are offering.

⁓ but it always comes down to the more intelligence we have, the better decisions we can make, the better manner in which we can serve our clients, the better strategies we can come up with. ⁓ and ultimately we hope that that drives better outcomes for our clients. ⁓ so whether it's an investment bank or a GP, having that level of granularity to show what is really happening within. Again, an inherently opaque asset class, that's incredibly important across, you know, many of our clients, well beyond just GPs.

Michael Venne: You know, this partnership is starting to make a lot of sense because we describe the use case for SPY along the very similar lines, better insights, better decisions. ⁓ Tyler, we've been using SPY internally and with LPs for years. ⁓ what does opening the deal level performance and operating metric data to the broader market through Pitchbook, what does that actually change? Tyler Johnson: Yeah, so ⁓ that's a super important point.

We we've been using this and vetting this data set and these capabilities ⁓ for years now internally to to enhance our own decision making processes, right? And we've actually shared much of this data ⁓ with our LP clients historically to provide them with that same level of insight and transparency into the asset class. So ⁓ we're gonna continue to provide that ⁓ to the to the LP community going forward, ⁓ it through SPY, like we've done historically. But now we're really trying to broaden access to these benchmarks to a broader private markets community, right?

Including GPs and and service providers. And effectively how we're doing that is is through a pitchbook. So of course, right, PitchBook being one of the leading providers of deal and company intelligence data, ⁓ it just really ended up being a a natural fit ⁓ right for us when we were looking for someone to distribute these benchmarks to a to a wider audience. ⁓ but also as an added benefit, right?

Again, with Pitchbook being one of the leading providers of deal and company data, they brought a lot of very useful information as well on the companies and deals in our own data set that we were able to effectively enrich and expand some of the capabilities of the tool. Effectively, what we're able to do is attach their classifications to our data model to provide more granular ⁓ filtering and reporting capabilities through the tool. So ⁓ it's not just distribution, really the data that they Bring to the table, just adds more capabilities and enhances the product ⁓ itself.

⁓ one thing though that I should make clear here, though, is that data confidentiality is has been very important to us and it's going to continue to be very important to us in this partnership as well. So all of the outputs of the tool are are all aggregated and anonymized, right? To protect the confidentiality around individual managers or individual deals, and there's really no way to isolate individual deals and managers within the tool. ⁓ It still does provide a lot of transparency into how different granular segments are performing, but it's not providing transparency into individual deals or managers themselves.

Michael Venne: ⁓ I'm glad you made that super important distinction. I'm I'm gonna Paul Santarelli: As much as our clients would love that, ⁓ I think that that is an important point. ⁓ and it doesn't in any way ⁓ you know ⁓ take away from how valuable that benchmark level data is ⁓ at the aggregate. Michael Venne: I'm gonna attempt to play back what I've been hearing.

⁓ you've got a market where top quartile has been more art than science, partly because the data was fragmented, partly because there's no neutral place to put it. And what you're describing is isn't just more data, it's a structural change in how GP or an LP can actually answer the question, how am I doing? Right. To Paul's point, how can I better tell my story?

⁓ I think that's a great segue into what I want to discuss next, which is if benchmarks become real, what changes in behavior? Paul, I'm gonna go to you first to maybe tackle this from the general partner perspective. You know, how does better benchmarking raise the bar on fundraising narratives, or does it somehow commoditize them? Paul Santarelli: Yeah, I don't think that it it commoditizes.

I think it absolutely raises the bar on behavior. And I think that this is what RGPs have been asking for, right? They are creating value, but have a hard time providing that proof in the market. ⁓ so being able to have that data to show where where they are bringing genuine value creation to their portfolios and and for their investors, I think is incredibly valuable.

And the more transparency, the better. ⁓ I think it creates. Avenues for further accessibility when you have a fall small fund ⁓ with niche strategies to be able to show how that strategy is performing against maybe some larger funds so that LPs can ultimately understand their allocations, understand where they want to commit, do better manager diligence, et cetera. I think that all of that raises the bar entirely.

⁓ and there's there's no downside to that level of transparency in this market because. We want to be able to show where wins are happening, ⁓ what good looks like, and hopefully that be can become replicable over ⁓ you know, many, many GPs. Michael Venne: Tyler, similar follow-up to you from maybe from the LP perspective, you know, how does this shift or affect due diligence and the manager selection process? Tyler Johnson: So I I think it certainly does shift and enhance the manager selection due diligence process for LPs, right?

Like like we've discussed ⁓ already, right? Fund benchmarking is still important, right, to understand ⁓ what returns were actually delivered to the LP and where that fund ranks and all the different funds out there in private markets. But where it falls short is really explaining why or how the manager generated that performance and and quantifying that, right? ⁓ so to to give you an example of of how it's useful, well, deal benchmarking we think allows us to separate the alpha and beta sources of returns, right?

And what I mean by that is did the manager generate the performance because they chose the right beta at the right time? Did they select the right industry, geography, strategy, et cetera, that performed on average above the other sectors? ⁓ geographies, et cetera. ⁓ or that would be beta source of return, or did they actually generate alpha?

Did they outperform in that particular industry geography, et cetera? ⁓ so to give you a real world example of where this is helpful, you know, take tech performance in general, for example. ⁓ tech has generated significant outperformance historically. ⁓ so when you look at many tech specialist funds that only invest In tech, they typically look pretty good on a fun benchmarking basis.

But what these benchmarks allow you to do is look at the tech specialist performance relative to all other tech deals, for example, in buyouts, right? You we are able to aggregate all of the tech buyout deals completed by their peers and also generalists that also invest in tech and aggregate that into a centralized tech-focused buyout. benchmark to compare that manager on a more apples to apples basis. And you can look at things like performance metrics, right?

Looking at on on a multiple or IRR basis. You can look at things like loss ratio, which you can only do with deal-level benchmarking as a sort of gauge of risk. So if they were being relatively more aggressive or conservative compared to their peers, looking at operating and valuation metrics as well as value creation analysis. So there's a lot of different cuts of the data that you can use to to effectively, like like Paul said, explain the story, quantify how the manager ⁓ under or outperformed relative to their peers.

So certainly think that's a super important thing for LPs to do, to have that kind of deeper level of understanding, right? Is a very important consideration for LPs to make before committing to a manager's next file. Paul Santarelli: And we're certainly hearing just to to corroborate your point out from the GPs that that that their LPs are asking for that. They are asking to, you know, show how you are creating those returns, whether it's beta or alpha.

⁓ so the inability to be able to do that at scale thus far is is absolutely a blocker in being able to effectively fundraise and for LPs to do that diligence. Michael Venne: I'm gonna ask you both to maybe put on gaze into a crystal ball. ⁓ and beyond benchmarking, where do you see the private market's data stack heading in the next few years? And you can only I'm guessing both you may want to say AI.

You can both say AI, provided you answer it d slightly differently. ⁓ so ⁓ yeah, you get to go first, Paul. Paul Santarelli: I get to go first then. Tyler Johnson: So Paul Santarelli: I mean, I I could certainly talk.

I think that there's a number of different things and and we can certainly talk about AI. I you know, I wanted to go back to something that that Tyler spoke on earlier and just the level of rigor that stepstone brings to validating, cleaning, ⁓ you know, putting methodology around the data sets so that there is some level of standardization. ⁓ and the work that our two teams are doing to be able to marry the pitchbook methodologies and standardization with the stepstone. And and having that source of truth at lingua franca about what is happening in the market, I think that's incredibly important, ⁓ especially in the age of AI where it is very easy to get answers.

⁓ and it is also very easy for those answers to be wrong. ⁓ and having trusted data sources that you know the rigor has been put into taking the 19 different sources of information that we might find something direct from the horse's mouth that you are s are are going to see at stepstone. And turning that into standardized, normalized set of information that can be leveraged at scale. ⁓ and that is incredibly difficult to do.

And I think that our our two teams and having that ⁓ first principle around that integrity and the methodology behind the data is really important, especially as more AI ⁓ applications come onto market and and data appears to be more accessible than than maybe it is. So I think that that's a really important point. ⁓ And I'll I'll transition into thinking about, you know, other ⁓ components of where ⁓ the private capital markets are going. Public private convergence is real.

⁓ we are seeing it, you know, ⁓ in a lot of different ways, a lot of funds, creating new vehicles, whether you know, semi-liquid, evergreen vehicles to increase accessibility into the market ⁓ from more channels, I think is a real trend. It is a real thing that will continue to happen. ⁓ And as the private capital markets get more retail focused investors, the level of information that is necessary, ⁓ the level of transparency that is necessary for that investor type to make good decisions really changes ⁓ when you change the investor base.

So having this level of data to create more standardized benchmarks and take it a further to indexes that can really be marked against, I think is is a trend that will happen. And, you know. can only happen effectively ⁓ if there is a solid set of foundational, fundamental, normalized, standardized benchmarking information that we as a as a partnership can provide the market. Michael Venne: Tyler.

Tyler Johnson: Great. And I, you know, my my answer is gonna sound very similar ⁓ to Paul's here. But yeah, no, I I would think w what what's coming in the near term, right, in the next three to five years is just more depth of data, more types of analysis that's been historically available within private markets. ⁓ really leveraging AI, we're able to gather more granular data that's been harder to access historically in private markets.

So just a better and more granular understanding of different trends and drivers. in the asset class is is probably what's on the horizon. so so where it specifically helps again is on the data collection side, but it also helps us ⁓ as well in in leveraging ⁓ high quality data sets in in more ways across the organization. So so this repeating a little bit of what Paul said, but ⁓ focus on high quality, right?

AI doesn't help solve the the the classic garbage in, garbage out dilemma. ⁓ You need to plug in AI tools into high quality trusted data sources to generate any sort of high quality insight derived on that data. So so it's certainly a focus of ours on making this data more accessible. That's certainly top of mind for us in PitchBook and is on our near-term roadmap of targeting various integration options of the data in terms of feeds, ⁓ APIs, et cetera, built into the data set, beyond just the web application interface, right?

Making these these data and tools more accessible ⁓ to a broader data ecosystem and AI tooling is is something that's super important for both of us in the near term. Michael Venne: Before we move on to the to the closing, I'm gonna maybe a quick lightning round, thirty seconds to each of you. One thing that will look obvious in five years that s looks novel today. Tyler, what you get to go first this time.

Tyler Johnson: Pooh, this is tough. I I saw this, I don't have anything good. That's not just repeating what I've already said, right? Michael Venne: All right.

This segment will just cutting room floor. Tyler Johnson: I just cut up there, but yeah. ⁓ Paul Santarelli: Ha ha. Tyler Johnson: Maybe Paul has something good here.

Paul Santarelli: ⁓ I mean, ⁓ I I might be repeating, but I do think, you know, the shifting investor base into alternative assets I think is very real. ⁓ and I think that the prevalence and the increase in ⁓ scrutiny and transparency required for investing in private capital and alternative assets is only going to increase. ⁓ and I think we will look back in five years and say, of course we have to have this level of information, of course we have to have this level of transparency.

⁓ And I'm glad that, you know, between Pitchbook and Stepstone, we can, you know, set the set the set the bar high for what that looks like ⁓ over the next five years and really lead in that area. Tyler Johnson: Think I actually have something ⁓ now maybe that that that builds on what Paul just said. Michael Venne: Yes, go. Paul Santarelli: Let's just like keep going here.

Tyler Johnson: I I'd say one thing that will look obvious in the next three to five years is that LPs, especially as we expand into more retail-oriented segments here, ⁓ just demand a greater level of transparency into their underlying portfolios. It's not gonna be enough that people just understand what funds they committed to. ⁓ they're gonna really have to understand what deals and exposures they have underneath those funds. And then naturally when they try to understand how those deals ⁓ have performed, they're gonna need a benchmark for for those for those deals.

And that's the gap that that we think we're we're we're filling here. Michael Venne: We somehow landed on two great answers to a what seemed like an impossible question. So thanks both for playing. so I'm gonna attempt to land the conversation from today.

really taking away three things from this conversation. One is private market benchmarking has been a credibility problem as much as a data problem. And partnerships like this one are how they get solved, not by one firm declaring a standard, but by a neutral infrastructure that the whole market can point to. Secondly, the real unlock isn't a new data set, it's a new default, a world where show me the comparables becomes easier to answer and where both GPs and LPs alike have to sharpen how they pitch and how they pick.

And then three, you know, the more interesting frontier isn't maybe returns benchmarking, but it's the granularity and the standardization. And really digging into like how companies are actually performing beneath the IRR. And that's where the next few years of this conversation are going to live. Tyler Paul, ⁓ thank you both so much for your time for joining me today.

Tyler Johnson: Thanks for having me. Paul Santarelli: Thank you, Michael. It's been a pleasure.