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Can Private Equity Continue To Outperform Public Equities?

Private Equity investments have grown in popularity in recent years, and justifiably so. It sounds smart, has certain elite status to it, and generates some impressive returns. Institutional investment consultant Cambridge Associates recently released their Q3 2019 update to their family of PE indices, so this week, we are taking a look at the returns dynamics of this fascinating…(industry, asset class, investment style - plug your favorite description here).

First, we want to note that due to the specifics of related accounting, most partnership returns are available in a quarterly frequency, and that is the frequency used by the Cambridge Associates Private Equity Index. So, to do benchmark comparisons and other types of analysis one would need to convert the returns of all other instruments into a quarterly frequency, too. This can be fine for a one-off chart, but for regular analysis it may become annoying without a proper tool, so we do our analysis in AlphaBot that converts the return frequency of any selected instruments automatically.

The performance comparison starting in 1994 (the beginning of available data for the index) looks very impressive for private equity, significantly outperforming public equities during the period.


By every measure, the Cambridge Associates private equity index outperformed; total return, volatility, average annual return, Sharpe and Sortino ratio.


But how consistent is this outperformance? Let’s take a closer look at quarterly returns.


Take another look. The blue bars for the PE Index are considerably higher (or shorter when negative) prior to 2009, and past 2009 the differences become much smaller and less frequent. So let us run the VAMI chart (or rather, VAQI chart, since the returns are Quarterly) once again, this time focusing on the post-2008 period.


Wow. The Cambridge Associates Private Equity Index is basically following the public equities, toe-to-toe. To give it credit, it does this with less than half of the volatility of the S&P index, so the risk-adjusted stats are very impressive, and very few other asset classes come close to it. At the same time, comparing this with the earlier period - the pre-crisis period - we see that the PE industry may be running out of fresh ideas on how to beat the relentless public equity bull market. After all, a rising tide lifts all boats, so it is quite a challenge to jump even higher. Our concern is what happens if (or rather, when) the tide goes out - will the industry be able to outsmart it this time?

Dmitri Alexeev is Founder and CEO of AlphaBot, a collaborative platform for alternative investment research.


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