“Thompson reminds Taylor that they have not yet finalized the foundation’s evaluation process for alternative investment performance. He tells her, “You’ve decided to measure the performance of private equity investments against a broad equity market index and private credit against an investment-grade fixed-income index, both having a goal of an excess of benchmark return after fees of 200 basis points (bps). These are in keeping with industry practices. We will measure return and return volatility using reported values from each fund’s quarterly reporting and market values for the indexes. A difference between the publicly traded and alternative asset portions of the portfolio is the need for the foundation to develop procedures to monitor alternative investment managers and processes”
“Private equity investment is to be in the nonventure sector, and private credit in the direct lending sector”
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Question: Thompson’s comments to Taylor regarding the evaluation of alternative investments are least likely appropriate with regard to:
- benchmarks for private investments.
- valuation and risk of alternative investments.
- the need to monitor managers and investment processes.
Why are the benchmarks correct? Private credit is largely to non-investment grade issuers, so why would it be feasible to benchmark it to an investment-grade fixed income index?