Private Equity Is Still Equity, Nothing Special Here

Abstract

US private equity returns can be replicated systematically through public equities, historically by selecting small, cheap, and levered stocks. Investing in private equity entails the same economic exposure as investing in public equities, resulting in the high correlation of both asset classes. The volatility of private equity returns is understated as a result of smoothing, and the risk-adjusted returns are comparable to those of public equities. These attributes, in addition to the complexity and illiquidity of the asset class, make private equity unattractive compared to public equities and challenge its current popularity among capital allocators.

TOPICS: Private equity, portfolio management/multi-asset allocation, equity portfolio management, performance measurement, volatility measures, quantitative methods

Key Findings

• • US private equity returns can be replicated systematically via public equities, historically by selecting small, cheap, and levered stocks.

• • Investing in private equity provides the same economic exposure as investing in public equities, resulting in both asset classes being highly correlated.

• • The volatility of private equity returns is understated, and risk-adjusted private equity returns are lower than those of public equities.