Bridging Public and Private Market Data

The shift from public to private equity markets has changed the landscape of investment opportunity. Private companies are staying private for longer, while the number of public companies has shrunk. Investor portfolios should reflect the changing landscape: institutional investors have made private market investing a staple of their portfolios. High-net worth individuals are following suit.

Rapid advancements in technology have also disrupted traditional industries and created new opportunities for innovative businesses in areas such as artificial intelligence, cybersecurity, and healthcare technology. This shift away from the traditional industrial-based model toward an “innovation economy” has fueled a surge in entrepreneurship and startup activity, and venture capital has helped power this dramatic growth.

It’s vital that investors of all types – including asset managers, institutional owners, and high-net worth advisors – see a complete picture of the market that captures modern realities. To do so, they will need to overcome these challenges:

• Asset owners and advisors need to understand risk and return at the portfolio level, and tomorrow’s portfolio is a public-private hybrid. However, risk and return analysis that would be routine for public market assets can be challenging and operationally complex in the private markets, where companies and funds are not subject to regulatory disclosure requirements.
• They also need private market data that supports integrated views across public and private investments.
• Private companies are not traded daily, and the infrequent valuations and lack of available daily pricing information make it difficult for advisors to precisely the rewards and risks in client portfolios that come from allocations to private markets.

Building better private market data will be an industry-wide endeavor, but Morningstar and PitchBook have already begun. We offer a private market data roadmap, noting progress where we at Morningstar and PitchBook have been able to make it.

Introduced in 1964 to simplify settlement, the humble CUSIP number is a unique nine-digit ID assigned to stocks and bonds in the U.S. and Canada. In the public markets, security identifiers serve as a kind of glue: they enable data portability and interoperability between vendors, data sets, IT systems and so on. Currently, there is no standard security identifier for private companies. Establishing one would improve information flows and reduce barriers to private market investing.

Reference data are attributes, such as industry classifications, country codes or inception dates, appended to the security data record.

Traditional industry groups, like the Morningstar Global Equity Classification System (GECS) that are used to classify public companies, still largely reflect the foundations of the industrial economy. However, as the global economy continues to evolve, investors can gain valuable insights into the drivers of future economic growth by utilizing an industry classification system that mirrors the real-world economic ecosystem.

For example, PitchBook's industry verticals provide a taxonomy for discovering innovative companies exposed to similar growth drivers. Managed by PitchBook’s emerging technology analysts, the classification framework groups companies that focus on a shared niche or specialized market spanning multiple industries.

Vertical classifications are determined in several ways, including the observance of venture capital flows and/or the emergence of startups pursuing similar high-growth business opportunities and innovative technologies. Because the industry verticals are not mutually exclusive, companies can be categorized into multiple verticals.

For verticals achieving the highest deal values, PitchBook’s in-house industry experts validate companies’ inclusion based on proprietary research, industry-acknowledged ecosystem maps, product documentation, customer use cases, and investment themes. This process results in comprehensive categorization of public and private companies in analyst-curated verticals offering the most promise for long-term growth.

PitchBook’s industry classification system is multi-faceted. They assign industry codes that have harmonized with the public markets, providing better data integration at the portfolio level. They also assign privately-held companies to 141+ “emerging spaces”—nascent but growing areas of thematic investment like psychedelics and long-duration energy storage that might one day become industries.

In the public markets we can track intraday prices by the second. The U.S. Financial Accounting Standards Board classifies private equity as Level 3 securities—financial assets that are the most illiquid and hardest to value.

Investors and service providers need reliable prices to value portfolio holdings. Prices must be based on a sound valuation process which satisfies regulators and gives investors’ confidence. There is a cottage industry of third-party valuation services who offer pricing for individual securities at a price point that is out of reach of most investors.

Morningstar and PitchBook’s proprietary mark-to-model index attempts to close the valuation gap by creating a methodologically sound, consistent way to evaluate the performance of late-stage, venture-capital-backed private companies that have reached a post-money valuation of $1 billion.

It includes three factors:

• Past deals factor: price data from the subject company’s prior funding rounds.
• Private comparable factor: price data from VC deals involving privately-owned companies that are similar to the subject company.
• Public comparable factor: price data from a Morningstar Thematic Index representing the performance of a global public market industry we have mapped the subject company to.

Asset owners and advisors want to be able to run aggregate risk and return analysis across both public and private portfolio holdings. Returns data for private-equity and venture-capital funds are generally available on a quarterly basis, meaning that at any point in time, returns data is at best from the prior quarter. (In practice, lag times can be longer, reflecting the pricing and data collection process: net asset values are established through third-party valuations and are collected from both fund managers and their institutional investors.)

PitchBook publishes private funds returns data, as well as operational and reference data such as the fund’s contact details, investors, information on past deals, strategy, and industry, sector or geographical investment preferences. The next step is to normalize and integrate this private market data with public securities datasets so that asset owners can better construct and analyze public-private portfolios holistically—albeit, with a lag.

Indexes are calculated once a day at the close of public markets in the U.S. using a proprietary pricing model. (The market price for a privately held company is established during funding rounds, which can occur 18 months or more apart.)

Indexes help investors understand market structure and risks, benchmark investments, and make asset-allocation policy decisions. Better benchmarks would bring greater efficiencies to private market investing and provide investors with the consistent, comparable information they need to make informed investment decisions.

PitchBook has published quarterly benchmarks for private-fund performance since 2017. Last year, we began publishing PitchBook Private Capital Indexes spanning private equity, venture capital, real estate, real assets, private debt, funds of funds, and secondaries funds.

In 2023, we launched the Morningstar PitchBook Global Unicorn Indexes, which create a benchmark for late-stage venture-backed companies with valuations of over $1 billion. Following explosive growth in the past decade, there are more than 1,300 unicorns worldwide, representing $4.5 trillion in aggregate market value.

The Morningstar PitchBook Global Unicorn Indexes, which are accessible through Morningstar Direct, provide daily valuation estimates for unicorns using a proprietary model that incorporates prices for private startups and comparable public companies.

The shift from public to private equity markets – as well as the shift away from the traditional industrial-based model toward a “innovation economy” –has created a pressing need for better investment data.

At Morningstar and PitchBook, our mission is to empower investor success. We have expanded the work we do to improve public-market data availability, transparency and comparability to the private markets as well.