Ariel Ezrahi is a partner at NewVest, a New York-headquartered private markets index manager. The five-year-old firm, which has USD 680m in assets under management (AUM), claims to offer the industry’s first scaled investable private markets index.

Q: What type of clients do you serve and what kind of problems are you solving for?

A: Our investor base includes sovereign wealth funds, endowments, pensions, and wealth platforms, as well as high net worth individuals and single and multi-family offices. The one thing they all share is a desire for diversification. While many funds-of-funds take an active approach, generally investing in a concentrated number of funds, our passive, investable indices target commitments in up to 50 funds, seeking to deliver market beta in individual private markets asset classes on a vintage period-by-vintage period basis. Research shows the average pooled return of private equity as an asset class has historically exceeded the median, with approximately 70% of funds underperforming the average pooled return in each vintage year. What NewVest is seeking to do is to provide an additional option for investors to gain broad exposure to private markets.

Q: Are you effectively competing for allocations that have traditionally gone to fund-of-funds?

A: We don’t see ourselves as competing because we are a very different animal. The economics are different from most fund-of-funds. What NewVest set out to do is to find a cost-efficient way to provide investors with access to this basket of the market. We see ourselves as disruptors in the fund-of-funds space. We don’t talk about our performance; we talk about the performance of the market and the underlying funds in the basket.

Q: How do you move the needle on diversification if an LP’s commitment to NewVest represents a small portion of its overall portfolio?

A: Commitment sizes vary widely across our investor base – from high-net-worth individuals to large sovereign wealth and pension funds. For us, diversification effectively means buying the market. We invest in some of the largest funds by fundraising target in each vintage. By doing that, we can provide broad diversification, as opposed to being invested in just one or two funds. We believe geopolitical volatility reinforces the need for diversification because investors increasingly want to avoid putting all their eggs in one basket. Based on recent conversations with Asian investors, there is growing appetite for strategies that bring diversification in the current climate.

Q: Some LPs want to build more concentrated portfolios, putting greater emphasis on manager selection because they think this will deliver better returns. Are you contrarian in this sense?

A: Most of our investors already run active, concentrated portfolios, but we see a clear role for passive as part of a core-satellite framework, which is similar to how many investors approach their public markets portfolio construction. When we launched our first index product more than three years ago, if you had asked me whether we would be successful with institutional investors, I might have said, “I hope so.” Now, we see those investors complementing their active programmes with the passive approach NewVest has been espousing globally. When we meet with them, the question is often: “Why hadn’t I heard of this before?” Because it didn’t exist until we introduced it.

Q: So, the NewVest role is as supplement rather than replacement?

A: It depends on the LP. Say one institutional investor has no private equity exposure and sees the passive index as an efficient way to build it. We certainly have those conversations. Another investor might already have an active programme and wants to augment it with passive exposure. This comes down to the core-satellite approach to portfolio construction. Whether passive serves as the core or the satellite is up to the individual investor, based on their philosophy and track record. We see both types in the market.

Q: The less well-resourced the LP, the more likely they are to want a turnkey solution?

A: For a single-family office with substantial assets but few investment professionals, the passive approach can be highly attractive because it provides private equity exposure without the need for extensive single manager due diligence. Some family offices have deep investment teams capable of robust active selection. Even then, they might choose to complement active mandates with passive exposure, allowing them to focus on their concentrated ideas while still gaining exposure to market beta. For high-net-worth individuals without a dedicated family office, this model brings access to an asset class that was previously the preserve of large institutional investors. We view this democratisation of private markets as a positive development – qualified investors now have a potentially simpler path to participation.

Q: Is it feasible for large LPs to develop index investment strategies in-house?

A: Some are increasingly looking to make passive their core, reserving a smaller portion for active selection. But replicating this internally is a question of scale. While an institution might build an index of six or 10 funds, that is generally not representative of the market. To capture the average returns of the asset class, you need a truly broad index, and we believe we are the only ones with an investable index of scale that makes direct commitments to underlying private funds.

Q: What happens if you broaden your strategies to include more hard-to-access middle-market managers?

A: A passive investment offers a clear and efficient partnership to GPs; it doesn’t require the same level of due diligence as an active investment. To date, we have successfully secured access to many of the global top-tier managers. This is fundamental to our current strategy – without it, the passive index model would not be viable. As for potential expansion, the model remains consistent: we don’t do active selection. And, if anything, smaller funds typically have lower minimums, which could make access easier.

Q: To what extent is a passive approach applicable in Asia, given that the gap between top-quartile and medium-performing managers is wider than globally?

A: Statistically, academic research has show that a private equity fund has just as much chance to be in the first quartile as in the fourth in the next cycle. Even top-quartile managers tend to exhibit inconsistency in their returns over time. If it is indeed true that the performance gap is wider and persistence is lower in Asia, that could make the case for passive, index-based investing even stronger. We believe there is certainly a place for an investable index approach.

Q: NewVest claims that passive index-based investment allocation could account for USD 10trn in private markets by 2035. What might accelerate or hinder that adoption?

A: We see increasing allocations to private markets, and platforms like ours can help mobilise that capital. Geopolitical volatility reinforces the need for diversification, and private equity allows a medium- to long-term view, unlike public markets. Much of the innovation in energy transition, AI [artificial intelligence], and other technologies is likely to come from private companies, making it critical to channel capital there. While liquidity shocks or conflicts could temporarily drive investors toward fully liquid assets, history shows that during volatile periods, maintaining a basket-based, index exposure to private markets can be highly beneficial in the long run.

Q: What specific challenges have you faced in rolling out your strategy?

A: One key challenge is the agency issue. Investment professionals often have bonuses tied to active selection, so passive approaches may not align with their incentives. Overcoming this often requires engaging leadership, such as the principal of a family office, who may be more open to exploring passive strategies alongside active ones. Additionally, any new market approach takes time for adoption.

Q: Broadly speaking, what impact could index-based performance benchmarking have on private markets?

A: We sit on a vast amount of data, which is highly valuable. An index is designed to provide more clarity, which can enable passive investors and active managers to benchmark performance relative to the market. We have partnered with S&P Dow Jones Indices on their launch of the S&P Private Equity 50 Indices, which comprise actual and timely underlying private fund data provided – on a no-name basis – by NewVest and S&P Dow Jones Indices. It is designed to bring greater transparency and accountability to private equity. More specifically, the intent is to allow investors to benchmark their private equity performance while accounting for uncalled capital, a critical factor often overlooked in current performance methodologies, such as PME [public market equivalents].