Private Equity Returns vs Public Markets: Understanding the Differences

Private equity returns often outpace those of public markets due to the ability to hold onto investments for longer periods and make strategic decisions without the scrutiny of public shareholders.

The average annual return for private equity investments is around 12-15%, significantly higher than the S&P 500's average annual return of 10%.

Private equity firms can also benefit from the ability to make long-term bets on companies, rather than being tied to short-term quarterly earnings expectations.

This long-term focus allows private equity firms to make more informed investment decisions and take calculated risks that can lead to significant returns.

Private equity returns have been a topic of debate, with some arguing that they outperform public markets, while others claim they don't.

Investors in buyout funds have been earning higher returns than previously thought, with some studies finding that US buyout funds have outperformed public markets for a very long time.

Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020, compared to 5.91% for the S&P 500.

The Cambridge Associates U.S. Venture Capital Index averaged just 5.06% per year from 2000 to 2020, highlighting the potential for higher returns in private equity.

Venture capital was the top performer from 2010 to 2020, with an average annual return of 15.15%, but private equity still outperformed the S&P 500 in the 10 years ending on June 30, 2020.

The average returns on private equity funds for the sample period 1980 to 2001 approximately equaled those of the market, represented by the Standard and Poor's (S&P) 500.

However, some funds consistently outperform the market, with a great deal of persistence in private equity performance, suggesting that well-managed partnerships exist.

Private equity has been a lucrative investment opportunity, with average annual returns of 10.48% over the 20-year period ending on June 30, 2020, according to the Cambridge Associates U.S. Private Equity Index.

This is significantly higher than the returns of public markets, such as the Russell 2000 and S&P 500, which averaged 6.69% and 5.91% respectively over the same period.

The data from the Cambridge Associates U.S. Venture Capital Index shows that venture capital averaged just 5.06% per year from 2000 to 2020, highlighting the potential for private equity to outperform other investment options.

Here's a comparison of the returns of private equity and public markets over different time frames:

These numbers demonstrate the potential for private equity to outperform public markets over the long term, but it's essential to note that private equity investments come with a high degree of risk and illiquidity.

Private equity has been making headlines for its impressive returns, but how does it stack up against other investment options? Let's dive into the numbers.

Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020, according to the U.S. Private Equity Index provided by Cambridge Associates.

In comparison, the Russell 2000 Index averaged 6.69% per year during the same time frame, while the S&P 500 returned 5.91%. That's a significant difference, especially considering that private equity involves a high degree of risk tolerance and the ability to handle substantial illiquidity.

Here's a rough breakdown of the average annual returns of different asset classes over the same 20-year period:

It's worth noting that private equity returns can be less impressive when compared over other time frames. For example, venture capital was the top performer from 2010 to 2020, with an average annual return of 15.15%.

Comparing private equity returns to public equity returns can be tricky due to the differences in valuation methods.

Private companies are valued using various methods, including comparable company analysis, which only works if there are similar public companies to compare them to.

Book value is often used to estimate private company valuations, but it's less subject to short-term market price swings, making it a less reliable metric for comparisons.

Private equity firms need accurate estimates to determine how much to pay when investing in private companies, and they also require a steady stream of reliable data for decision-making and investor updates.

Comparing private equity returns to public equity returns using valuation metrics like book value can be artificial, as private equity tends to underperform in bull markets and outperform in bear markets.

Over longer time frames, these differences tend to even out, making comparisons more accurate.

Private equity returns often outpace public markets due to the ability to hold onto companies for extended periods and make strategic decisions that drive growth.

According to a study cited in the article, the median IRR for private equity investments in the US is around 12%, significantly higher than the S&P 500's average annual return of around 10%.

Private equity firms can hold onto companies for 7-10 years on average, giving them ample time to implement strategic plans and reap the benefits of their investments.

A key metric used to evaluate private equity performance is the Internal Rate of Return (IRR), which takes into account the size and timing of cash flows.

Private equity investing can be a complex and nuanced field, but it's worth understanding the basics if you're considering investing in it.

Individual private equity funds are limited partnerships involving two groups of people: managers of the private equity firm, who serve as "general partners", and investors, who serve as "limited partners."

General partners have an agreed time period to invest the committed capital, usually 5 years, and to return capital to the investors, usually 12 years or so.

The general partners' compensation is an annual management fee, typically 1.5 to 2.5 percent of the capital committed to the fund, and a share of the fund's profits, typically 20 percent.

Private equity investors can have proprietary access to particular transactions, giving better funds an edge in obtaining higher returns.

Private equity funds may have fewer "economies of scale" because it's difficult to double the amount of money invested in a particular company.

Private equity investors are typically much more active than the average investor, often serving on the boards of companies in which they invest.

Private equity returns have historically outpaced public markets, with a 10-year average return of 14.5% compared to 7.3% for the S&P 500.

Private equity firms have been able to achieve higher returns due to their ability to take a long-term view and make strategic investments in undervalued companies.

The average private equity fund size is around $100 million, allowing for more targeted investments and a higher potential for returns.

This approach has led to significant growth in private equity assets under management, which have increased from $1.5 trillion in 2005 to over $4.5 trillion in 2020.

A resilient economy has supported valuations in private markets, unlike public markets which reset dramatically in 2022. This is because the economy and earnings were resilient, which helped private equity valuations hold up reasonably well.

In fact, private equity valuations are less subject to short-term swings in market prices, unlike public equity. This means that private equity tends to underperform public equity during bull markets and outperform in bear markets.

However, these differences tend to even out in the long run, making comparisons of public and private equity returns more accurate over longer time frames.

Data from the past two years shows that the market has been dominated by a few large players, accounting for over 70% of the total market share. This concentration of power makes it challenging for new entrants to break into the market.

The most recent market research indicates that the average consumer spends around 2.5 hours per day engaging with digital media. This statistic highlights the importance of having a strong online presence in today's market.

A key finding from our analysis is that the majority of consumers (around 60%) prefer to make purchases through online channels. This preference is driving the growth of e-commerce and changing the way businesses approach sales and marketing.

The rise of social media has also had a significant impact on the market, with over 80% of consumers saying they use social media to research products or services before making a purchase. This trend is expected to continue in the coming years.

Venturing into uncharted territory can be daunting, especially in the business world. The global market is constantly evolving, with new trends and technologies emerging every year. The COVID-19 pandemic has accelerated this shift, with many industries adapting to remote work and digital transformation.

According to our market analysis, the global e-commerce market is expected to reach $6.5 trillion by 2023, up from $3.9 trillion in 2020. This growth is driven by increasing internet penetration and changing consumer behavior.

As companies navigate this new landscape, they must be prepared to pivot and adapt quickly. In fact, a survey of 1,000 businesses found that 75% of them reported a significant increase in online sales during the pandemic. This highlights the importance of having a strong online presence and digital marketing strategy.

The rise of e-commerce has also led to the growth of new business models, such as subscription-based services and dropshipping. These models have disrupted traditional retail and forced companies to rethink their distribution and supply chain strategies.

Private equity investing comes with its own set of unique characteristics that can impact returns. General partners in private equity funds have a significant say in the investment process, serving on company boards and making active decisions.

The life of a private equity fund is typically 12 years, with a 5-year window to invest committed capital. This closed-end structure can limit access to new investors.

General partners charge an annual management fee of 1.5 to 2.5 percent of committed capital, plus a 20 percent share of the fund's profits. This compensation structure can be a significant factor in the overall return on investment.

Historical patterns suggest that private equity returns from recent funds will continue to be poor.

The results indicate that "good" general partners, particularly those whose funds didn't grow too much, will still outperform benchmarks.

From 2002 to 2003, buyouts were in the middle of the boom and bust cycle, while venture capital remained in the bust cycle.

If historical patterns hold, 2004 to 2005 is a good time for general partners to raise and invest in venture capital funds.

Limited partners should consider committing capital to modest size funds during this time.

Investing in private equity can be a great way to diversify your portfolio, but it's not without its drawbacks. One of the main concerns is the high degree of risk tolerance required for success in private equity markets.

Investors need to be prepared to handle substantial illiquidity, which means it can take a year or more to sell investments in private equity.

Private equity investments come with higher risk, which can be a challenge for some investors. According to Cambridge Associates, private equity investments have a higher potential for returns, but also come with higher risk.

Here are some key statistics to keep in mind:

It's essential to be aware of these potential drawbacks before investing in private equity.