PE outperformed in US state pension portfolios over past two decades – report

Private equity allocations delivered nearly twice the returns of public equities over a 22-year period, according to investment adviser Cliffwater's chief executive.

Private equity allocations by US state pensions have produced almost twice the investment gains of public equities over a 22-year period, research from investment adviser Cliffwater has found.

Private equity delivered a 11.4 percent net-of-fee annualised return for the entire 22-year period ending 30 June 2022, exceeding the 5.8 percent annualised return that would have been earned by investing in public stocks, according to Cliffwater’s annual research. The resulting 5.6 percent annual difference also surpasses the expected 3 percent annual excess return, net of all fees, of the asset class over public equities in the long term.

Cumulative private equity returns as of June 2022 were the highest at 10.9 percent, and also compare favourably against 2021’s 9 percent.

Looking at the fiscal year return differences – or excess returns between the private equity composite and the public stock benchmark – 2022 produced a 21 percent return for private equity, 36 percent better than public equities.

The report said, however, that “the 36 percent excess return is likely overstated to some degree by the timing of private equity valuations at 30 June 2022, and will be adjusted when 2023 returns are reported”.

Cliffwater’s findings were drawn from data provided in the annual comprehensive financial reports published by 94 state pension systems in the US.

Excess returns from PE do experience cycles, with periods of low- or no-excess returns followed by periods of high-excess returns, Stephen Nesbitt, chief executive of Cliffwater, noted in the email accompanying the report.

Nesbitt also noted that issues around the way private equity firms value their portfolio companies in a challenged macro environment, as well as “imperfections in short-term valuation”, may likely cause some overstatement in 2022 returns.

Nesbitt believes private equity returns will be muted this year as valuations get more aligned with market multiples. He told Private Equity International: “The denominator effect will keep new LP commitments below average, but at the same time we are seeing commitments from new investors. So it is difficult to know the overall direction.”