Is Private Equity Overrated? (Published 2021) (2024)

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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.)