Industry performance is better than previously thought, but success is getting harder to repeat. Investors and firms will need to adapt to changing conditions.
Private equity Changing perceptions and new realities
Private-equity performance has been misunderstood in some essential ways. It now seems that the private-equity industry decisively outperforms public equities with respect to risk-adjusted returns, which may prompt return-starved institutional investors to allocate even more capital to able to produce consistently successful funds. That’s because success has become more democratic as the general level of investing skill has increased.
The new priority for success is differentiated capabilities. Limited partners (those who invest in the funds raised and managed by general partners) expect funds that exploit a general partner’s distinctive strengths will do well, while more generalist approaches may be falling from favor. Institutional investors will need to get better at identifying and assessing these skills, and private- drive their performance.
A new understanding of an elusive industry
2000 to about 3.9 percent in 2012. Along the way it has boomed and busted alongside public markets, while inexorably taking additional share. At the same time, many have observed that private equity— though ostensibly an “alternative” asset class—has in two ways drifted toward the mainstream. Several researchers concluded in the mid-2000s that, on average, buyout funds underperformed the research has found that private-equity returns have become highly correlated with public markets.
As the perception of private equity’s differentiation has waned, the fees that the industry charges their role to the public.