Cambridge Associates sued by rival over performance calculation

In a complaint filed early last month, Zug, Switzerland-based Capital Dynamics alleges that Boston-based Cambridge Associates, in using its modified public market equivalent (PME) method of comparing the performance of private and public equities, infringes a U.S. patent awarded to it in 2010. U.S. Patent No. 7,698,196 is entitled ”Method And System For Modeling and Benchmarking Private Equity And Applications of Same,” according to the suit, which was filed Nov. 1 in the U.S. District Court for the Southern District of New York.

In a prepared statement, Deirdre Nectow, managing director, Cambridge Associates, said: “While it is our general policy not to discuss matters involving litigation, we believe this action has no merit. We respect the valid intellectual property rights of all parties. In this case, we are confident that there has been no patent infringement, and we believe that this will be borne out. It is our hope that this issue is resolved quickly.”

Capital Dynamics declined to comment for this article.

Interest in ways to compare the performance of private and public equities has been growing. In the wake of the financial crisis, for example, many investors began questioning whether their private portfolios were worth the money.

One of the first calculations to be described as a PME method was developed in the early 1990s by Austin Long, co-founder of consulting firm Alignment Capital Group, and Craig Nickels, head of U.S. fund investments in the private equities department of Abu Dhabi Investment Authority. At the time the two worked in the private investments group at University of Texas Investment Management Company.

The method involves matching the cash flows of a private equity fund with that of a public equity index fund—buying the S&P 500 index, say, when cash is drawn down by a private equity fund and selling when cash is returned. At any time the IRR of both the private equity fund and its mirror public market equivalent can be calculated and compared.

But the Long-Nickels method is widely regarded to have shortcomings that Capital Dynamics strove to address when it introduced its PME+ method around 2003. That’s according to a draft academic paper dated Nov. 21 and co-authored by Oleg Gredil, a PhD student at the Kenan-Flagler Business School of the University of North Carolina, Barry Griffiths, vice president on the quantitative research team at secondary buyer Landmark Partners, and Rüdiger Stucke, a research fellow at the Saïd Business School at the University of Oxford.

Cambridge Associates also tried to improve on the original Long-Nickels PME with its modified PME version, according to the paper, although the exact timing of its rollout is unclear. In the introduction to its second-quarter index and benchmarks report, Cambridge Associates wrote that it “has been using mPME for research, manager due diligence and selected client analyses for some time…”

Capital Dynamics has asked the court to stop Cambridge Associates from infringing on its patent, arguing that it has been “irreparably harmed.” It has asked the court for triple the amount of any damages awarded, “because of the willful, knowing and wanton nature” of Cambridge Associates’ conduct.