INVESTMENT ACTIONS

On the historical outperformance of private equity

An evaluation of private equity returns compared to their respective public market equivalents

This study measures the outperformance or alpha of private equity funds relative to public market indices and finds material outperformance across the board. All results shown here are objective market data, and no assumptions or amendments were made to the data.

Absolute and relative performance

As opposed to public equity investments where the investor is immediately fully invested, private equity managers call committed capital from their investors over time as they find investment opportunities and distribute principal and gains as investments are exited. For this reason, the timing and sizing of cash flows is more important than in more traditional asset classes. Private equity practitioners do not typically report time-weighted returns but analyze and report performance in a money-weighted performance metric, such as the internal rate of return (IRR). Various methods can be used to estimate the outperformance of private equity; however, the ‘Direct Alpha Method’ is generally accepted to, yield the most precise and reliable comparisons to public equity returns1.

Dispersion of outperformance across funds

In addition to showing the aggregated outperformance of private equity funds over the MSCI World Index, it is also important to depict the median and interquartile range between the 25th and 75th percentile performing funds.

Dispersion of private equity funds’ outperformance over the MSCI World Index per vintage year.

Dispersion of private equity funds’ outperformance over the MSCI world index per vintage year.

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Dispersion of outperformance over the MSCI World Index per vintage year and in aggregate as of December 31st 2020 – all in USD. Private Equity performance data sourced from Burgiss covers vintages 2002-2018, 2,209 funds, and USD 2,399 billion in market capitalization. Private equity strategies include: Buyout, VC (Late), VC (Generalist), and Expansion Capital. All returns are net of management and performance fees.

Outperformance across market cycles

The empirical results shown thus far represent the historical outperformance of a universe of private equity funds aggregated per vintage year as of December 31st  2020, however, the variation or volatility of this outperformance over time is not displayed.

Time-evolution of direct alpha and dispersion

Time-evolution of direct alpha and dispersion thereof over time

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Time-evolution of direct alpha and dispersion – all in USD1. Private Equity data sourced from Burgiss covers vintages 2002-2018, 2,209 funds, and USD 2,399 billion in market capitalization. Private equity strategies include: Buyout, VC (Late), VC (Generalist), and Expansion Capital.

Download the full report on the outperformance of private equity
Institutional investors have steadily increased their allocations to private equity in order to meet their return targets. This paper evaluates private equity performance against benchmarks representative of the asset class and demonstrates material outperformance against various market cycles and public equity indices.
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Jeroen Cornel
Director, BlackRock PEP
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Kyle McDermott
Analyst, BlackRock PEP
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