How Good are Private Equity Returns?

This article provides an overview of existing studies as well as new evidence of the investment performance of U.S. private equity. Using returns reported by private equity funds and market returns on companies participating in private equity investments, the authors argue that private equity's attractiveness as an asset class is often overstated, in large part owing to biases in reported data on assets that are not traded. The authors' analysis suggests that the average net returns (after management fees) to private equity investors have not typically been sufficient to justify the illiquidity and costs associated with adding the asset class to one's portfolio. At the same time, however, the research also attests to the ability of the best buyout firms to outperform the market on a consistent basis. Thus private equity would appear to be a value-adding investment strategy only for those investors confident in their own ability to identify the best private equity firms and gain access to their funds.