Is private equity overrated?

Since 2017, investors have poured more than $1 trillion into global private equity buyout funds. That amount dwarfs the cash directed to venture capital, real estate funds, private debt, hedge funds and just about any other form of alternative investment, according to McKinsey.

It’s not hard to see why: Investors have been told over and over again that these private equity funds produce the best returns, far outperforming the stock market (and just about everything else). As a result, private equity has become the hottest home for institutional money, whether that of pension funds, endowments or sovereign wealth funds. Lately, retail investors have also bet big on the strategy.

But private equity’s returns increasingly may not provide the stellar performance that investors have been sold — and the returns can be misleadingly calculated in a way that overstates success.

As of September 2020, private equity funds had produced a 14.2 percent median annualized return, net of fees, over the previous 10 years, compared with 13.7 percent for the S&P 500, according to an analysis of indexes by the American Investment Council, a lobbying group for the industry, using the latest numbers offered. Public pension funds invested in private equity actually had worse returns than from the S&P 500 — 12.8 percent, net of fees. (These returns, and others quoted in this article, do not include venture capital, which is typically viewed as a separate asset class.)

Private equity firms have long engaged in contentious practices, including loading companies with debt and laying off workers. And calls for more transparency have arisen in Congress and the Securities and Exchange Commission. In October, Senator Elizabeth Warren, the Massachusetts Democrat who is one of Capitol Hill’s most vocal critics of private equity, reintroduced legislation that would, among other things, require more disclosure of returns and fees by private equity funds. The S.E.C. chair, Gary Gensler, has said the agency is taking a look at the same issues.

You can read the rest of my New York Times column here:


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