How Do Private Equity Investments Perform Compared To Public Equity?

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How Do Private Equity Investments Perform Compared To Public Equity? by SSRN

Robert S. Harris

University of Virginia – Darden School of Business

Tim Jenkinson

University of Oxford – Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Oxford – Said Business School

Steven N. Kaplan

University of Chicago – Booth School of Business; National Bureau of Economic Research (NBER)

April 8, 2015

Darden Business School Working Paper No. 2597259


The merits of investing in private versus public equity have generated considerable debate, often fueled by concerns about data quality. In this paper, we use cash flow data derived from the holdings of almost 300 institutional investors to study over 1,800 North American buyout and venture capital funds. Buyout fund returns have consistently exceeded those from public markets; averaging about 3% to 4% annually. We find similar performance results for a sample of almost 300 European buyout funds. Venture capital performance has varied substantially over time. North American venture funds from the 1990s substantially outperformed public equities; those from the early 2000s have underperformed; and recent vintage years have seen a modest rebound. The variation in venture performance is significantly linked to capital flows: performance is lower for funds started when there are large aggregate inflows of capital to the sector. We also examine the variation in performance of funds started in the same year. We find marked differences between venture and buyout leading to a much more pronounced impact of accessing high performing funds in venture investing.

How Do Private Equity Investments Perform Compared To Public Equity? – Introduction

Despite the large increase in investments in private equity funds, the historical performance of private equity (PE) remains a subject of considerable debate. Fueling that debate has been the difficulty of obtaining high quality data for research. Private equity is called “private” for a reason. There is no requirement for those running private equity funds-the General Partners, or GPs-to make their data available. Of course, they provide this data to their current and potential investors-the Limited Partners in their funds, or LPs—but normally under confidentiality agreements that prevent sharing the data. And even if one obtains comprehensive data, measuring returns to illiquid private assets is a complicated task. It thus comes as no surprise that assessments of private equity performance are not easy.

In this paper, we examine private equity performance of over 2000 funds through June 2014. Our data are high-quality fund level cash flows sourced by Burgiss from almost 300 private equity fund investors. We focus on comparing two ways investors can have residual equity claims on companies: limited partner stakes in a private equity fund or ownership of publicly traded stocks.1 Despite the real differences between the two forms of ownership (including liquidity and control over cash flow timing), portfolio managers increasingly see them as alternative routes to equity exposure rather than as separate asset classes.

Our new data allow us to update and extend prior research in light of dramatic shifts in public and private markets in recent years. Public equities have surged since the financial crisis, with many market indices up 50% or more. And private equity funds suffered large write-downs during the crisis but these were largely reversed in the following years. Fundraising stalled during 2009-2010 but has since returned strongly. In an earlier study (Harris, Kaplan and Jenkinson (2014)) we focused on North American private equity funds using returns through March 2011. In this paper we update and extend this earlier analysis, adding more North American funds, several hundred European funds, and with updated cash flows and asset values that reflect the significant movements in markets in the last few years. As well as providing a comparison of private equity and public equity performance, we also use this larger data set to examine the role of high performing (“top quartile”) funds in determining investment results.

Many of our new findings echo those from earlier research despite the dramatic market shifts of the last few years. Over long periods of time, buyout fund returns have consistently exceeded those from public markets. Venture capital (VC) funds started in the 1990s substantially outperformed public equities; however, those started since 2000 have generally underperformed.

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