I often hear of investors (or even other advisors) who want to buy private equity investments with the hope of achieving better returns. Private equity is owning a company that is not publicly traded (ie it’s private). Private equity usually has little liquidity (b/c there is no public market for the shares). Private companies often have high debt loads (to max returns to investors), and the private equity fund manager will usually charge higher fees (compared to public stock fund). So the question remains, “Does private equity really have higher returns?”

In this article on the CFA Institute blog, the author points out that private equity returns have been in line with small cap stocks over the last 30 years.

Chart source:

So, next time you hear someone talking about their fancy private investment, you can kindly point out that small cap stocks have historically offered similar returns with more liquidity, lower debt levels, and lower management fees. Although private equity investments can make an investor feel fancy, it does not mean those investors will necessarily have better returns than public investors.

Disclaimer: past performance is not indicative of future results.

Rabener, Nicolas. “Private Equity: The Emperor Has No Clothes.” Enterprising Investor, CFA Institute, 12/3/2018

Leave a Comment