Whitepaper - Morningstar Indexes - Taking the Private out of Private Equity with the Morningstar PitchBook Buyout Replication Index

Using take-private transaction data, quarterly financial statements, and stock price data, we created a neural network to systematically capture the fundamental characteristics of buyout investing within a portfolio of public equities.

We then adjusted this model-based portfolio for leverage and sector exposures to construct a portfolio that replicates a PE buyout strategy: the Morningstar PitchBook Buyout Replication Index.

In a backtest starting in 2014 and running through November 2024, the Buyout Replication Index outperformed the Morningstar US Small Cap Extended Index by 6.1 percentage points on an annualized basis. Sector selection, leverage, and security selection contributed 0.9, 1.3, and 3.9 percentage points, respectively, to this outperformance.

Authors:

Sanjay Arya, Head of Innovation, Morningstar Indexes
Andrew Akers CFA, Lead Quantitative Research Analyst, PitchBook

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