Private Equity Versus Stock Market Returns

A recent article in The Wall Street Journal offers insights regarding the comparison of returns between private equity and the stock market.

The article makes the following points:

  • While the above graph “looks nice and simple,” the comparison (developed using an index developed by research firm Preqin), “is a theoretical construction, and that underscores the difficulties in comparing public and private investing.” It adds that private-equity firms keep investor dollars locked up for long periods of time compared to the public markets. Further, private-equity performance is measured using internal rate of return (IRR), a “complex calculation of cash flows.”
  • Public market returns, it says, are simpler: “you put your money in and then watch day to day whether it grows in value over time.”
  • The measurement of private-equity returns can be tricky, the article notes, since investors channel money in as fund managers need it for specific deals. Therefore, it adds, returns have to take into account the notion of “vintage” or when a fund began investing. “Like wine, a fund’s vintage, or the year it started making investments, has a big impact on the returns investors see in the real world.” The calculation isn’t straightforward, it argues.

The article provides several graphs from Cambridge Associates that compare returns using a hypothetical public portfolio. “The picture,” it concludes, “is quite mixed.”