Does Private Equity Outperforms Public Markets?
Private Equity vs. Public Equity: What 20 Years of Data Really Tell Us
Over the last two decades, private equity has evolved from a niche asset class to a larger part of institutional portfolios. Often referred to as the domain of sophisticated investors, private equity promises outsized returns and a closer connection to value creation.
But how does it really compare to traditional public equity markets like the S&P 500 and MSCI World over the long term? More importantly, does the private equity premium hold up under scrutiny, and can it continue in the years ahead?
Long-Term Performance
To begin, let’s analyze historical return data. According to Cambridge Associates and Preqin, U.S. private equity funds have consistently outperformed public equity indices over the past 10 to 20 years.
Between 2012 and 2022:
- Private equity delivered net annualized returns of approximately 14% to 15%
- S&P 500 returned about 12% to 13%
- MSCI World Index offered 10% to 11%
The spread widens further over 15-year horizons, underscoring private equity’s advantage during periods of economic recovery and volatility. This superior performance isn’t just a statistical anomaly—it is rooted in structural advantages such as active ownership, access to private deal flow, and a longer-term investment horizon.
Volatility and Risk-Adjusted Returns
Private equity’s reported returns come with nuances, especially when we consider volatility.
Volatility
Unlike public equities, which are marked-to-market daily, private equity assets are valued at every round table of the company as well as on the secondary gray market, based on IPO and buy-out potential.
Sharpe Ratios
That said, PE often demonstrates higher risk-adjusted returns. Analyses from McKinsey and Bain & Company show that:
- Private equity Sharpe ratios hover between 0.7 to 1.0
- Public equities generally fall between 0.5 to 0.7
What Drives the Private Equity Premium?
Unlike public market returns—driven largely by macroeconomic factors and market sentiment—private equity returns stem from deeper, controllable levers:
- Illiquidity Premium: Compensation for long lock-up periods (8–10+ years).
- Leverage: Financial engineering to boost equity returns.
- Operational Alpha: Direct involvement in portfolio company strategy, leadership, and execution.
- Market Inefficiencies: Exploiting mispricings in niche sectors and small-cap markets.
Performance Dispersion: Why Manager Selection Matters
One of private equity’s most striking features is its wide performance dispersion. Unlike public equity funds, where performance is clustered, PE fund returns vary dramatically.
According to Preqin and Cambridge Associates:
- Top-quartile funds: 18% to 20%+ net IRR
- Median funds: ~13% to 14% net IRR
- Bottom-quartile funds: 5% to 8% IRR (some negative)
This reinforces the critical importance of due diligence and selecting the right GP.
Why Institutions Love Private Equity
Today, PE represents 10% to 30% of portfolios at pensions, endowments, and sovereign wealth funds.
Key Reasons:
- Superior long-term returns
- Access to innovation and high-growth firms
- Diversification from public markets
The Yale Endowment Model famously pioneered this shift, showing how alternative allocations can boost total returns with lower volatility.
The Challenge of Dry Powder and Return Compression
One of the biggest risks today is the amount of dry powder in the market. Bain & Company reports that more than $2 trillion is waiting to be deployed across private markets.
This excess capital increases deal competition, raises entry multiples and makes value creation harder
Funds relying solely on multiple expansion are now facing headwinds. The focus is shifting back to operational excellence.
What the Next Decade Holds
Market Forecasts
- Bain & Company: PE to outperform public equities by 200–300bps
- McKinsey: Increased dispersion; top funds continue to win
- Preqin / PitchBook: Mid-teens IRRs for top-performing GPs; more modest returns for others
Key Themes Going Forward:
- Operational alpha over financial engineering
- Specialization in sectors and strategies
- Rising importance of ESG and sustainability metrics
Conclusion
Private equity has consistently outperformed public equity markets over the past two decades. This performance is grounded in structural advantages such as active ownership, long-term orientation, and the ability to drive operational improvements. Yet, this outperformance is not guaranteed. High dispersion among funds, increasing competition, and a challenging macro environment demand a thoughtful approach to manager selection and strategy.
For long-term investors—particularly institutions with the ability to lock up capital—private equity continues to offer compelling return potential, especially when partnered with top-tier managers.
Sources: Cambridge Associates, Preqin, Bain & Company, McKinsey & Co., PitchBook, MSCI, S&P Dow Jones
