Is Private Equity Delivering?


Institutional investors new to private equity typically seek to understand the asset class’s performance relative to broad, passive public equity indices such as the S&P 500. Private equity assets share many features with publicly-listed equities, and can behave similarly over the long run. Given these shared features, the use of public equity indices for benchmarking purposes is an accepted standard within the private equity industry, notwithstanding a number of differences between the two asset classes.

Andres Reibel

Andres Reibel, PhD, is a Vice President in Pantheon’s Technical Research Team.

One fundamental difference between private and public equity investing is that unlike the majority of public equity investment managers, private equity fund managers usually acquire controlling stakes in firms with the goal of implementing material or beneficial change, whether it’s on an operational, financial or managerial level. Therefore, the investment role assumed by a typical private equity fund manager can differ considerably from the role undertaken by a typical public equity fund manager.

Despite the differences, similarities between private equity fund managers and public equity fund managers do exist: one of these is the active portfolio management component. Private equity fund managers aim to seek the most attractive individual company investments when constructing their portfolios and are not constrained by the requirement to consider any specific reference benchmark or index. Similarly, some public equity fund managers will deviate substantially from the public equity benchmark against which their performance will generally be measured.

Nik Morandi is a Partner and Global Head of Portfolio Strategy and Research at Pantheon

Nik Morandi is a Partner and Global Head of Portfolio Strategy and Research at Pantheon

Rather than passively tracking a benchmark index, public equity managers will aim to produce outperformance by actively identifying stocks that have the potential to perform more fruitfully than public equity markets overall. Today very few public equity fund managers regard themselves as purely “passive index trackers”, but there is a range based on the level of divergence from the relevant public market index that a particular manager is prepared to bear. The more a public equity fund manager does this, and thereby diverges from an index when constructing its overall portfolio, the more it can be thought of as an “active” equity fund manager1.

Based on our selected dataset and time period, Pantheon’s research finds that private equity has outperformed both passive and active equities on a historical basis, net of management fees and carry, or a percentage of a fund’s profits that private equity managers keep for themselves. Our analysis set out to quantify historical private equity returns from 1990 to 2006 relative to public equity benchmarks, and established significant outperformance against both the passive public equity benchmark as well as an active public equity universe. At the end of this article you will find a link to the complete research including full methodologies.

Comparing U.S. Buyout Funds to the S&P 500 – Passive

One of the most cited pieces of academic research examining the comparative performance of private equity and public equities is a recent study published by Robert Harris, Tim Jenkinson and Steven Kaplan. The study focused on the long-term performance of both U.S. buyouts and U.S. venture funds, based on a comprehensive dataset provided by Burgiss2. We have focused exclusively on the U.S. buyout component of its study3.

Pantheon’s research, building on the work of previous publications such as the Harris et al. study, concluded that investors could have achieved, on average, a 30.5% cumulative outperformance over the S&P 500 (net of fees) when investing in the select buyout funds with a North American geographic focus in the time period from 1990 to 20064.

This analysis was based on the standard Pubic Market Equivalent (“PME”) methodology5 used within the private equity industry to compare private equity against public market benchmarks.

Accessing Top Quartile Buyout Funds

We also thought it would be informative to conduct our own version of the Harris et al. study. Pantheon specifically looked at how upper quartile buyout funds have performed historically relative to the S&P 500 (Harris et al. only examined average performance)6.

When we conducted this exercise (i.e. based on top quartile U.S. buyout funds only7), our dataset generated an 89% net cumulative outperformance over the S&P 500 over the life of the funds. Annualized8, Preqin’s historical dataset suggests that top quartile U.S. private equity buyouts generated an annual net outperformance of approximately 4.9% compared to the S&P 500 (net of fees)9.

Comparing U.S. Buyout Funds to the S&P 500 – Active

Investors in private equity may wish to consider such wider benchmarking applications for their private equity portfolios that goes outside passive public equity benchmarks. This is likely to be more appropriate to the extent they regard a more “active”10 public equity investment style as a closer substitute for their private equity investment program.

It is evident there is a lack of publicly available studies that have assessed the advantages of replacing part of an active public equity portfolio with a comparably active private equity strategy. Thus, Pantheon compared U.S. private equity performance to that of actively-managed U.S. mutual funds, using Bloomberg data11. We calculated PMEs12 for average and top quartile U.S. buyout funds against the average and top quartile active mutual funds from 1990 to 2006; a ‘like-for-like’ comparison of how funds in each category have historically performed relative to each other. Analysis determined a net outperformance of upper quartile U.S. buyout funds relative to the U.S. mutual fund peer group of approximately 3.7% annually. Average U.S. buyouts also outperformed mutual funds by c. 0.4% annually, or approximately 18% on a cumulative basis.

The results appear to provide further evidence in support of the historical outperformance of private equity relative to listed equities regarding the chosen dataset and time period.


The performance comparison relative to active public equities may deliver institutional investors with an additional measuring tool when considering how to distribute capital within their equity bucket. Nevertheless, before finalizing any asset allocation decisions, it would be sensible for investors to take into account a number of other factors that were not scrutinized in this evaluation, such as the potential spread of returns and the expected liquidity profiles of different asset classes. Moreover, a particular investor’s own individual preferences and risk tolerance levels should be considered.

However, to the extent investors regard an allocation to an actively-managed public equity program as the “next best alternative” to their private equity program, the results from our research and time period chosen suggests that private equity buyouts may historically have been the better choice.


Nik Morandi is a Partner and Global Head of Portfolio Strategy and Research at Pantheon, and Andres Reibel, PhD is a Vice President in Pantheon’s Technical Research Team.

Please click here to view Pantheon’s full study “Is Private Equity Delivering” or visit



1 “Active” strategies aim to beat the return from a particular market index or benchmark.

2 Burgiss is a well-known provider of information and investment tools for the private equity industry.

3 Throughout this article we have focused exclusively on U.S. buyouts and so we will not be examining the performance of U.S. venture funds.

4 Harris et al. used a private equity dataset from 1984 to 2008. We cut the dataset off at 1990 and 2006 because of the relatively small number of observations from the Burgiss and Preqin data sets prior to 1990 (1984 to 1989) and the immaturity of the 2007 and 2008 vintage funds – whilst some of these vehicles are now over seven years old, many are still in their harvesting phase and so not fully mature. If one included less mature funds then much of the performance would still be included in the net asset value (“NAV”); NAVs are subjective measures of performance and as such less reliable and/or subject to GP-specific judgments regarding valuations. Nevertheless, even based on the entire dataset utilized by Harris et al., the cumulative outperformance of U.S. buyouts relative to the S&P 500 averaged between 20% to 27% over a fund’s life and more than 3% annually. In calculating the cumulative outperformance of 30.5% we took an equally-weighted average of the PMEs within each vintage (1990-2006).

5 As in the academic research study, we focused on Kaplan and Schoar PMEs. Please note that the Preqin data sample generally has more observations in more recent vintages. However, our cumulative average PMEs (for both average U.S. buyouts as well as top quartile U.S. buyouts) are based on an equal weighting across vintages. As a result, we remove any vintage-specific bias or dependency from our results. When calculating the average outperformance of 30.5% from the Harris et al. study (based on average U.S. buyouts with vintage years between 1990 and 2006) we similarly equally-weight across vintages

6 We have excluded bottom quartile funds from our analysis as we are specifically interested in examining how the top quartile cohort would have performed. However, given the dispersion in performance between top and bottom quartile funds in private equity, we believe it is likely that bottom quartile funds would on average have underperformed relative to the S&P 500 on a PME basis over the same time period. Readers should bear this in mind when reviewing the results for the top quartile subset.

7 We again focus on 1990-2006 vintage U.S. buyout funds from the Preqin dataset.

8 We annualized based on actual cashflows from our private equity dataset and therefore the actual duration of the underlying funds (rather than an estimated life). However, to the extent an individual fund was not fully realized (particularly relevant for the more recent vintages) the annualized return was based on the length of time over which data was available.

9 Net of PE fees but gross of low cost ETF fees, which penalizes the PE performance by the annual fees one would have to pay to invest in something like a Vanguard S&P500 ETF.

10 Note that this definition is separate from “activist” public equity investors who, like private equity managers, do seek to effect meaningful operational, managerial or other organizational change within their portfolio companies.

11 The dataset consisted of 2,461 U.S. based mutual funds as provided by Bloomberg whose fund asset class was denoted as “equities”.

12 Note that one needs to subtract one from the average Kaplan and Schoar PMEs to arrive at the cumulative outperformance over the life of the funds. For example, the reader needs to subtract 1 from 1.61 and multiply by 100 to arrive at the cumulative percentage of outperformance for the upper quartile of the U.S. buyout funds over their active mutual fund peers.


Photo by thinkpanama via Flickr CC License

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