Private Equity has failed to outperform stocks, research says, but Limited Partners aren't turning away

From PitchBook:

Two decades ago, there was a consensus that private equity offered returns unmatched by the stock market.

But PE funds in the US have failed to outperform public stocks for at least 14 years, including one 10-year stretch in which the industry banked $230 billion in management fees on the promise of providing superior returns. Instead, those fees have turned into a massive transfer of wealth from LPs into the hands of a few buyout barons.

That, at least, is the conclusion put forth by Ludovic Phalippou, a financial economics professor at the University of Oxford's Said Business School, in a paper published earlier this month. The report is the latest recent instance of academic research that questions private equity's claims of outsized returns—the very claims that have allowed funds to gather billions from pension funds, institutional investors and now 401(k)s.

Yet, limited partners haven't turned away from the asset class, healthy fundraising figures indicate. LPs committed a record-setting $315 billion to US private equity funds in 2019, according to PitchBook data. From 2010 to 2019, the annual dollar amount of private equity commitments increased fivefold.

Hilary Wiek, a Pitchbook analyst focused on fund strategies and performance, doesn't expect studies like this one to affect fundraising. Since private fund returns can vary widely, so too do investor experiences, she said.

"Many LPs believe that they have the ability to select top-tier managers, who will do quite a lot better than the industry overall," Wiek said. "So evidence has a lower impact on the behavior of private market investors than might otherwise be the case. It is too easily explained away if the beliefs are strong."

The private equity industry, of course, has a very different take on Phalippou's research: Rebuttals by Apollo Global Management, Blackstone, KKR and The Carlyle Group attached to the paper offer several detailed critiques, taking issue with everything from the underlying data used and carry calculations to assumptions about risk and comparisons to the S&P 500. Blackstone noted a 2020 survey in which 87% of LPs said that returns from PE "either met or exceeded their expectations."....

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