By Jose Martinez Sanguinetti, Founder & CEO, Sothys Capital Published in partnership with Third Wire Asset Management
This article is also available in Spanish on LinkedIn, here: https://www.linkedin.com/pulse/una-nueva-puerta-de-acceso-al-capital-privado-ipgyc/
- U.S. buyout private equity funds have historically delivered strong returns but are difficult for Latin American institutions and family offices to access due to high minimums, complex structures, illiquidity, and limited transparency.
- The Morningstar PitchBook US Buyout Replication Index offers a new, systematic way to mimic the risk and return profile of U.S. buyout funds using public equities, leveraging machine learning trained on past take-private transactions.
- The index selects and weights 200 U.S. small- and mid-cap public companies that resemble typical buyout targets, adjusts sector exposures to match private equity, and applies leverage to reflect buyout capital structures.
- Over the past decade, the index has outperformed traditional benchmarks like the Russell 2000, with most of the excess return driven by security selection based on private equity-like characteristics such as strong cash flow, stable margins, and low valuations.
- For Latin American investors, the index provides daily pricing and full transparency, enabling benchmarking, informed discussions, and even direct exposure to buyout-style returns without the traditional barriers of private equity funds
Private equity has long captured the imagination—and the capital—of long-term investors. For institutions, family offices, and pension funds in Latin America, U.S. buyout strategies in particular have represented both a source of compelling historical returns and a frustrating challenge: high-quality funds are notoriously difficult to access.
The barriers are familiar: high minimums, complex legal structuring, long lock-ups, delayed capital calls, and limited transparency. Even when capital is allocated, performance is hard to benchmark, and liquidity is virtually non-existent for years at a time.
Yet a new approach to understanding—and even replicating—the risk and return profile of U.S. buyout funds is beginning to take hold. It doesn’t involve GP commitments or closed-end structures, or so-called ‘Evergreen’ funds. It’s an index. And it’s built from public equities.
This is the Morningstar PitchBook US Buyout Replication Index, a systematic framework for tracking the core economic characteristics of U.S. buyout investing through the public markets. And while it may not replace certain aspects of more traditional private equity investing, it helps demystify it—and has the potential to open doors that were previously shut to many in our region.
What the Index Is—and Why It’s Different
The idea behind Morningstar Indexes’ Buyout Replication strategy is straightforward: if private equity managers systematically acquire companies with certain characteristics, it should be possible to identify those same characteristics in public companies—and track their performance over time.
What makes their index unique is how it does that. It uses a neural network trained on more than a decade of take-private transactions—cases where private equity firms acquired public companies and took them off the market. By analyzing thousands of these deals, the model learns the patterns: which companies tend to be acquired, what financial traits they share, and how those traits evolve over time.
The index then applies these insights to a universe of U.S. small- and mid-cap public equities, identifying and weighting 200 companies most likely to resemble future buyout targets. Sector exposures are also adjusted to mirror the private equity landscape: overweight in technology, healthcare, and services; underweight in financials and real estate. Lastly, leverage is applied at the index level to reflect the post-deal capital structure typically seen in buyout transactions.
The result is an index that doesn’t just track public equities—it mimics the risk-return profile of private equity, including its exposure to cash flow-rich, operationally inefficient companies with upside potential.
What the Data Shows
Over the ten years ending in early 2024, the Buyout Replication Index outperformed the Russell 2000 by more than 8% annually. But the more interesting story is what drove that outperformance.
Roughly 85% of the index’s excess return came from security selection—meaning the companies chosen by the model were fundamentally similar to those being targeted by private equity GPs. And while sector tilts and leverage played a role, they were secondary to the underlying company characteristics: strong free cash flow, stable margins, low valuations, and operating inefficiencies.
It’s also worth noting what the index doesn’t do. It doesn’t rely on opaque pricing. It doesn’t smooth volatility through delayed or discretionary valuations. It offers daily pricing and full transparency into its holdings—something private equity firms cannot.
Relevance for Latin America
This transparency is precisely what makes the index so relevant for Latin American allocators.
For family offices and institutions that want exposure to the U.S. private equity opportunity set—but struggle with liquidity, access, or governance hurdles—the Index offers a clear reference point. It can be used to benchmark buyout fund performance more accurately, to evaluate how closely a given fund tracks the economic reality of the asset class, or even to express the view directly through a public markets lens.
For advisors, it introduces a way to have a more informed conversation with clients. Many investors in our region hear “private equity” and assume it means high fees, low transparency, and no control over liquidity. This index offers a tangible framework for exploring the strategy in a more accessible, data-driven way.
A Note on Implementation
There are now products, such as the Third Wire / Morningstar PitchBook US Buyout Replication Index Fund (USBRIF), which was launched in partnership with Morningstar Indexes earlier this year, that invest directly in the index’s constituents. It was designed to make implementation possible for qualified investors who want actual portfolio exposure to the strategy, not just a benchmark.
That said, the index itself deserves independent attention. Even without allocating capital, it’s a powerful analytical tool. It helps investors in Latin America understand how buyout strategies work beneath the surface—and assess whether the private equity funds they’re considering are truly generating alpha, or simply replicating what public markets already offer.
Final Thoughts
Private equity’s mystique has long rested on its exclusivity. The Morningstar PitchBook Buyout Replication Index and Third Wire’s USBRIF fund begin to shift that narrative. They don’t diminish the important role of private equity in capital formation—but they do challenge the idea that opacity, illiquidity, and inaccessibility are necessary trade-offs for most investors. And for investors across Latin America, it offers something rare in the world of alternatives: clarity.
In a region where access, liquidity, and timing often constrain what’s possible, having the ability to track—and potentially participate in—the economic drivers of U.S. buyouts through public markets is a development worth understanding.
Important Information
Jose Martinez Sanguinetti serves on the advisory board of Third Wire Asset Management.
The Morningstar Indexes are the exclusive property of Morningstar, Inc. Morningstar, Inc., its affiliates and subsidiaries, its direct and indirect information providers, and any other third party involved in, or related to, compiling, computing, or creating any Morningstar Index (collectively, “Morningstar Parties”) do not guarantee the accuracy, completeness, and/or timeliness of the Morningstar Indexes or any data included therein and shall have no liability for any errors, omissions, or interruptions therein. None of the Morningstar Parties make any representation or warranty, express or implied, as to the results to be obtained from the use of the Morningstar Indexes or any data included therein.
The Fund seeks to replicate certain characteristics of private equity buyout strategies but may not achieve the same results. Past performance is not indicative of future results. Investments are subject to risk, including loss of principal. Investments in public equities may involve significant risks, including market volatility, economic uncertainty, and potential deviations from the Fund’s intended strategy. There is no guarantee that the Fund will achieve its investment objectives.
The Fund is a private offering and is not registered under the Investment Company Act of 1940 or the Securities Act of 1933. As such, it is not subject to the same regulatory requirements as registered investment vehicles. Fees and expenses associated with the Fund may impact overall performance. Investors should review the private placement memorandum for a detailed description of fees and costs.
This article is for informational purposes only and may be shared with the general public under Rule 506(c). Any offer to invest is made exclusively through the Fund’s private placement memorandum or other authorized offering documents and is available only to verified accredited investors. Verification of accredited investor status is required prior to any investment. The Fund is offered pursuant to Rule 506(c) of Regulation D, allowing for general solicitation; however, investment is limited to verified accredited investors.
The Index uses advanced AI methodologies, including Long Short-Term Memory (LSTM) neural networks, to guide security selection and leverage adjustments. The effectiveness of these methodologies is not guaranteed and may be impacted by unforeseen factors or market conditions.
This article may contain forward-looking statements regarding the Fund’s strategy or expected performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially.
