That Age-Old Question – Do Buyout Funds Outperform Public Markets?

Although much of the private equity industry has focused on absolute performance measures such as internal rates of return (“IRR”) and total value to paid-in (“TVPI”), one of the key questions regarding the performance of buyout funds is how returns compare to those of public equity.

A recent study and resulting report, Dr. Gottschalg found that buyout funds outperformed public markets independent of the selection of a representative benchmark index over the globe for almost all vintages. To complete a performance comparison between private and public equity requires timed cash flows that many commercial data providers either do not have or do not make available to researchers. This study was unique in that it drew from a new dataset provided by the Institutional Limited Partners Association (“ILPA”), via their partnership with independent investment advisor Cambridge Associates. Furthermore, this dataset had not been used before in academic research.

Dr. Gottschalg used the combination of three main performance metrics to compare private vs. public performance – the Kaplan and Schoar Public Market Equivalent (KS-PME), the PERACS Rate of Return and PERACS Alpha – the purpose of which was to calculate the opportunity cost of capital against a public market benchmark (in this case the MSCI World Index) while also controlling for the effective time the committed capital was put at risk.


To illustrate the meaning of the metrics in the chart, a KS-PME of 1.39, for example, implies that at the end of the fund’s life, investor ended up with 39% more returns than they would have if they had invested in the public market (MSCI ACWI) in a time-matched fashion. A PERACS Alpha of 12% indicates that a fund has outperformed the MSCI World benchmark by 12% per year over its duration.

The above chart highlights that buyouts consistently outperformed the public market until the 2008 vintage. With the more recent vintages, raised funds are not yet completely divested and much of their value is still dependent on their net asset values, which may not reliably predict the ultimate performance.

The Risk and Return Characteristics of Institutional Buyout Fund Investments by TDGoddard on Scribd

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