An Inconvenient Fact: Private Equity Returns and the Billionaire Factory

Abstract

Private equity (PE) funds have generated returns that are about the same as those of public equity indexes since at least 2006. Large public pension funds received a net multiple of money (MoM) that sits within a narrow 1.51 to 1.54 range. The Big Four PE firms also delivered estimated net MoMs within a narrow 1.54 to 1.67 range. Three large data sets show average net MoMs across all PE funds at 1.55, 1.57, and 1.63. These net MoMs imply an 11% per annum return, which matches relevant public equity indexes, a result confirmed by public market equivalent (PME) calculations. Yet, the estimated total performance fee (carry) collected by these PE funds is estimated to be $230 billion, and most of it goes to a relatively small number of individuals. If all vintage years are included to 2015, the carry collected is $370 billion, with a performance similar to that of small-cap indexes but higher than that of large-cap stock indexes. The number of PE multibillionaires rose from three in 2005 to 22 in 2020. Rebuttals from the Big Four and the main industry lobby body are provided and discussed.

TOPICS: Private equity, performance measurement, statistical methods, quantitative methods, real assets/alternative investments/private equity

Key Findings

• • Private equity funds have produced returns about the same as those of public equity indexes since at least 2006.

• • Yet, the estimated total performance fees collected by these PE funds are estimated at $230 billion, and most of that goes to a relatively small number of individuals.

• • These results clash with commonly and strongly held beliefs.