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. Institutional investors have made private market investing a staple of their portfolios, and now high-net worth individuals are following suit.

Rapid technology advancements have also disrupted traditional industries and created new opportunities in AI, cybersecurity, and healthcare technology. This shift 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.

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

• Risk-and-return analysis that would be routine for public market assets can be challenging and operationally complex in the private markets. Private companies and funds are not subject to regulatory disclosure requirements.
• Private market data needs to support integrated views across public and private investments.
• Private companies aren't traded daily. Infrequent valuations and lack of available daily pricing information make it difficult for advisors to precisely assess the risks and rewards of private-market allocations.

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've been able to make it.

The humble CUSIP number is a unique nine-digit ID assigned to stocks and bonds in the United States and Canada. In the public markets, security identifiers serve as a kind of glue. They enable data portability and interoperability between vendors, datasets, 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 appended to the security data record, such as industry classifications, country codes, or inception dates.

Traditional industry groups used to classify public companies still largely reflect the foundations of the industrial economy. However, investors can gain valuable insights into economic growth drivers with 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 across industries.

PitchBook determines vertical classifications in several ways, including venture capital flows and the emergence of startups pursuing similar high-growth business opportunities and innovative technologies. 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 results in comprehensive categorization of public and private companies in analyst-curated verticals with the most promise for long-term growth.

PitchBook’s industry classification system is multifaceted. It assigns industry codes harmonized with the public markets for better data integration at the portfolio level. It also assigns privately held companies to 141-plus “emerging spaces”, or nascent but growing areas of thematic investment that might one day become industries. Examples include psychedelics and long-duration energy storage.

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 that satisfies regulators and gives investors confidence. A cottage industry of third-party valuation services offer pricing for individual securities at a price point that's out of reach of most investors.

Morningstar and PitchBook’s mark-to-model index attempts to close the valuation gap. It offers a methodologically sound, consistent way to evaluate the performance of late-stage, venture-capital-backed private companies with 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 similar to the subject company.
• Public comparable factor: price data from a Morningstar thematic index representing the performance of a global public market industry that the subject company maps to.

Asset owners and advisors want to be able to run aggregate risk and return analysis across public and private portfolio holdings. Returns data for private-equity and venture-capital funds are generally available on a quarterly basis. That means 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 collected from 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
• Industry, sector, and geographical investment preferences

The next step is to normalize and integrate this private market data with public securities datasets. That allows asset owners to construct and analyze public-private portfolios holistically—albeit, with a lag.

In the United States, indexes are calculated once a day at the close of public markets 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 consistent, comparable information they need.

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

Today, there are more than 1,300 unicorns worldwide, representing $4.5 trillion in aggregate market value. The Morningstar PitchBook Global Unicorn Indexes create a benchmark for late-stage venture-backed companies with valuations of over $1 billion. The indexes, 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 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’ve expanded the work we do to improve public-market data availability, transparency, and comparability to the private markets as well.