While private equity has made some wealthy, recent studies have shown that regular investors have not been the beneficiaries of this wealth. This according to an article by Larry Swedroe in Advisor Perspectives.

Swedroe writes that the research concludes, “private equity has not outperformed publicly available mutual funds on a risk-adjusted basis. And that does not even account for the liquidity that private equity investors forfeit.” He cites one paper by Harvard University’s Erik Stafford that shows there is “nothing special about private equity returns (except for the huge fees earned by the sponsors).”

Swedroe offers a synopsis of Stafford’s study methodology and findings, citing the following conclusion: “After paying fees, which are estimated to be 3.5% to 5% per year, investors who agree that the risk-match between the private equity index and the two replicating portfolios is appropriate are considerably underperforming the feasible alternative of investing in similar passive replicating portfolios.” Swedroe cites numerous other studies that have drawn similar conclusions.

Swedroe lists the following chatacteristics of private equity returns:

• Extreme positive skewness—the median return of private equity, he writes, is “much lower than the mean return.”
• High standard deviation—private equity returns reflect a standard deviation in excess of 100%, writes Swedroe, compared to about 20% for the S&P 500.
• “In addition to the risks of extreme skewness and high volatility,” Swedroe writes, “investors must consider that because of the inability to broadly diversify across hundreds or even thousands of stocks…PE investing involves accepting the risk that such investments may produce a wide dispersion of returns.”

Swedroe concludes that private equity strategies have “provided returns that have not been commensurate with their risks,” adding that this holds true even for institutional investors who have access to the “best managers.”