Has Private Equity Performed for Investors? An Annotated Bibliography

Abstract

A rich body of empirical research over the past 15 years addresses the basic question of whether investments in private equity generally benefit investors in terms of (1) whether net returns from private equity are generally higher than net returns on comparable public equities, (2) whether private equity investors generally earn a volatility premium or suffer a volatility penalty relative to public equity investors, (3) whether investors generally earn a premium or incur a penalty associated with the extraordinary illiquidity of private equity investments relative to comparable public equities, and (4) therefore, whether private equity investors benefit from the asset category on a risk-adjusted net-of-fees basis. This article reviews the extant research approximately by publication date to highlight changes in the questions addressed, the methodologies employed, and the investment environment that managers faced. The literature is remarkable in its failure to find consistent evidence that private equity investors benefit financially from their exposure to the extraordinary risks and principal-agent problems inherent in the private capital model.

TOPICS: Private equity, fundamental equity analysis, performance measurement

Key Findings

• • It is relatively easy to show that gross returns from private equity investments typically exceed those from investment in public equities, as proxied by widely cited indexes such as the S&P 500. However, showing that private equity outperforms relative to comparable public equity investments, especially net of investment costs, is not simple.

• • The risks associated with leverage (explicit or implicit), volatility, and illiquidity in private equity investing remain difficult to quantify but are more than large enough to call into question whether private equity performs on a risk-adjusted basis.

• • Ample evidence suggests that the persistent misalignment of interests between private equity investment managers and investors—in various forms, including manipulated asset valuations, distortionary use of credit facilities, pressure to spend committed capital, and opaque or misaligned compensation practices—significantly reduces the net-of-fees returns received by private equity investors, but evidence also indicates that investors may systematically be fooled in this respect.