In private markets, assets are valued less frequently, and managers enjoy substantial discretion when marking their books. This leads to artificially smoothed returns, resulting in statistics like volatility and maximum drawdowns substantially understating risks. Therefore, a vast body of literature has been dedicated to uncovering the true risk/return profile of private market investments and their relationship to public market benchmarks. Desmoothing or unsmoothing procedures use regressions to adjust return estimates statistically. Beyond that, this article looks into the information uncovered by discounts observable in the secondary market for fund participations (LP stakes).

• Artificially smoothed returns in illiquid assets can often be desirable for investors who prefer not to be exposed to the daily volatility of public markets.
• However, they make it harder to analyse the true underlying risk of the assets in question and to integrate them into traditional asset allocation models.
• Dedicated quantitative models permit investors to statistically desmooth reported returns.
• In this article, we compare the desmoothed returns for buyouts and venture capital obtained by applying traditional statistical desmoothing with information inferred from secondary market pricing to provide a more accurate assessment of the relative risk of private assets.