Feb 24, 2020 - Economy & Business

Private equity returns fell behind stocks over the past decade

Illustration: Aïda Amer/Axios

U.S. private equity returns fell just below S&P 500 returns for the 10-year period ending last June, according to a report released Monday morning by Bain & Company.

Why it matters: Private equity markets itself as beating public markets over long-term time horizons, and usually providing an illiquidity premium to boot. These new performance figures not only dent such claims, but provide fresh ammunition to critics of public pension investment in private equity funds.

Specific numbers: U.S. private equity fund IRR was 15.3% for the 10-year period, versus 15.5% for the S&P 500 public market equivalent.

  • "While a 15% average annual return net of fees is impressive even by private equity's own high standard, parity with public markets is not what PE investors are paying for," writes Bain.

Private equity's defense would be fourfold:

  • U.S. PE returns were strong over the past decade, and top-tier funds outperformed the S&P 500.
  • U.S. PE returns outperformed the S&P 500 over most other time periods.
  • European private equity returns are higher than their public market comp.
  • The last time we saw this sort of inversion was for the 10 years ending March 2000, and private equity easily outpaced public equity over the subsequent 10 years.

The real question is if private equity will be held accountable for the relatively lackluster results by limited partners, particularly in an era of rising progressive politics and progressively lower buyout fund returns. Not by blanket failure to support new funds, but by demanding more LP-favorable terms.

The bottom line: Private equity promises alpha. It hasn't delivered over the past decade. Expect that to be a major bone of contention this week in Berlin, where the world's largest private equity fund managers and limited partners meet for the annual Super Returns conference.

Go deeper

Pro athletes turn to private equity to diversify their investments

Illustration: Aïda Amer/Axios

Pro athletes are diversifying into private equity, after years of focusing most of their alternative investment activities on real estate and tech startups.

The state of play: The driving financier is Mark Patricof, who previously led a media and entertainment-focused investment bank that he sold in 2015 to Houlihan Lokey. His inspiration struck several years ago, when co-hosting a "Shark Tank"-like show with former New England Patriots star Rob Gronkowski, in which winning founders received pro athlete endorsements.

The forgotten firms in the Senate relief bill

Illustration: Sarah Grillo/Axios

The Senate late last night passed a $2.2 trillion safety net for the American people and American businesses. But not all businesses were included. The package left out thousands of small companies owned by private equity firms.

Details: The legislation includes $350 billion in small-business loans for companies with fewer than 500 employees. That's a liberalization of typical SBA rules, which are more industry-specific in terms of employee number and revenue.

Corporate America balks at potential strings attached in relief package

Illustration: Sarah Grillo/Axios

Uncle Sam today will become Corporate America's lender of last resort, but it's still unclear if it also will become its activist shareholder.

Driving the news: We're still awaiting full text of the bipartisan deal struck last night between the White House and Senate leaders, including if there will be any straight equity or warrants tied to financial help for affected industries and companies.