4. privateMetrics® Index Maintenance & Release Notes

After index construction, changes need to be incorporated to keep the indices current, relevant, and representative on an ongoing basis. The need to make changes can arise from the following sources:

1. An index constituent suddenly becomes ineligible to be part of the index. For example, companies go public, go bankrupt, or get acquired by another index constituent.

2. Annual recomputation of country and activity weights can lead to a decrease or increase in the number of companies that can be included in each industrial activity-country.

3. Valuation may fall and hence make a company ineligible when they are ranked again, and hence they may no longer qualify to be part of the index and be replaced by another company whose valuation has increased recently in that activity-country combination.

4. We expand our coverage of the underlying Broad private Market Universe (BMU) and begin pricing more private companies.

Our index methodology does reflect these events, and 1-3 also corresponds to how timely we reflect these changes in the index.

Monthly corporate actions

Companies that list in public equity markets, those that go bankrupt, or get acquired by other index constituents are removed from the index at the end of the month that such information is obtained. The listing (in case of IPO) or acquisition valuation is used as the exit price for those companies. However, for companies that declare bankruptcies, we assume a return of -100% in the month they are removed, thereby introducing no survival bias in the index.

These changes are reflected for both the market indices and PEU/BMU benchmarks. However, the market indices also need replacements whereas the PEU/BMU benchmarks do not require them. Thus, for the market indices, once these companies are excluded, the next eligible company in the industrial activity-country combination is included, i.e., the company with the highest valuation which has just been left out from the index.

Annual reconstitution for market indices

Our methodology for the Market Indices to compute country and sector weights uses annual inputs, thus making it feasible to perform a reconstitution exercise every year. We effect these reconstitutions in June of every year, using the most recent valuation and macroeconomic information. Specifically, we recompute each country activity’s weight, the number of eligible companies for each group, and the ranking of the valuation of eligible companies.

In these annual reconstitutions, we follow a constrained approach to minimise the turnover in the indices, as there are trade-offs between being more representative and not changing the index entirely. To minimise turnover, we impose two constraints as described below. 

Annual reconstitution for market indices - banding

For companies that get excluded from an index due to a fall in valuation rank during the annual sorts, we provide some relief in the form of a lenient threshold for staying in the index as compared to new entrants that scale up in ranks. The threshold applicable for existing constituents is computed as a fixed percentage greater than the applicable threshold for each country-activity for new entrants into the index. This fixed percentage applicable for each country-industrial activity is optimised so that the overall index turnover is restricted to be less than 20% as a result of the annual reconstitution exercise.

An example of banding: there are 5 companies included in the United Kingdom in the retail activity, and three of them have been part of private2000 in 2022, with the smallest having a valuation of $ 40 million. When sorting in May 2022 with the valuation of eligible companies, it is estimated that the 5^th company has a valuation of $ 45 million – the threshold for inclusion. The three companies that have been part of the index get a valuation boost of, say 20%, then the smallest existing constituent gets a valuation of $ 40 × 1.20 = 48 million, thereby making this company rank higher than the one with a valuation of $ 45 million. Thus, the existing constituents get to maintain their index membership, reducing turnover for the index. But if the smallest existing constituent was to have a valuation that is less than $ 45 million even after the 20% boost, then it would be excluded from the index.

Other than the ranking sorts leading to turnover, two important sources of turnover remain, including:

1. Lack of financial information on a private company: An index constituent on which we had previously obtained financial information may not receive additional updates on its accounts due to a variety of factors, including that the company deregistered or a vendor we use did not capture its data, etc. In such cases, we tolerate and wait for a reasonable amount of time for the company to declare its results (the base expectation is that financials become available 6 months after the close of fiscal year) and another fixed amount of time for regulatory reporting, vendor data acquisition, and our processes to capture the information. If such thresholds are not met, then such companies get dropped out of the index on account of having stale financial data. Our thresholds for staleness are inspired by country-level variations in disclosure and data acquisition processes and are periodically reviewed.

2. Reallocation in the past and progression towards ideal weights when more data becomes available: Our reallocation algorithm ensures that when certain industrial activities do not receive the number of companies required, the algorithm picks other larger companies in the same country so that the country-level weight requirements are satisfied. However, in subsequent years, when more data becomes available, our methodology prefers to pick the industrial activities that originally were allocated the weights, leading to turnover at the index level.

Both these situations cause turnover in our index, and we carefully manage so that we can update our data through other means, and the progression to ideal weights is performed in a calibrated manner.

Accommodating an expansion of BMU

When we can obtain, validate, and process new data on private companies globally, it becomes essential to consider whether these companies become eligible as constituents of our market indices. Without any guardrails, our methodology might flood the index with new constituents whenever our data coverage expands. To mitigate this, we follow a calibrated approach for replacements as described below:

1. An expansion in data coverage arising from new data that becomes publicly available or through vendors can improve the quality of our database. However, a problem arises when there is an abrupt change in coverage, and our methodology picks the largest in each activity-country group.

2. To avoid such situations, we stratify the country-activity companies in the Private Equity-Backed Universe (PEU) into market capitalisation categories (e.g., small cap, mid cap, large cap, etc), and count the frequency of companies in each category/activity in the country.

3. When selecting replacements or constituents during the annual reconstitution, we restrict the PEU to resemble the frequency counts above with some leeway, which allows us to accommodate larger companies into the index, in a calibrated rather than abrupt manner.

Disclosure:

Explanation of how ESG factors are reflected in the key elements of the benchmark methodology: The privateMetrics market indices, including the private2000, privateUS, privateEurope, and privateAPAC, do not explicitly consider any ESG factors, i.e., Environmental, Social, and Governance - based factors, either in the valuation of the constituents or as criteria for inclusion/exclusion/maintained in the indices.