A CFA Institute article offers analysis of private equity returns in the U.S. (using data from Cambridge Associates).

Using the data, the Institute created a U.S. Private Equity Index the compare the industry’s performance against the S&P 500:

But while the data shows outperformance, the article notes that the trend is “more illusion than reality. After all,” it says, “private equity portfolio companies are typically valued on a quarterly basis so lack a daily time series. In addition, most portfolio company valuations are smoothed as they are conducted by external appraisers using business plans from the private equity firms.”

The article dissects private equity returns, explaining that performance is “not as uncorrelated to public equities as institutional investors might like them to be.” It also notes that private equity firms typically target lower-valued but more highly levered companies presenting opportunity by virtue of “temporary structural issues” that can be mitigated.

To test the thesis, the CFA Institute created two portfolios: “one with small and cheap stocks and another with small, cheap and levered US stocks.” The findings showed that, between 1988 and 2018, the portfolios outperformed the US Private Equity Index. But the article concludes: “Some have reached similar conclusions and proposed that the nature of locked-up capital is what makes private equity so advantageous…But the same fund structure can be replicated through public equities at a fraction of private equity fees.”