Most investments are inherently risky, but in private equity’s case, the relative payoff may be worth the gamble.
The Private Equity Growth Capital Council released a study last week indicating that private equity has outperformed the Standard & Poor's 500 public market index in one, five and ten year time horizons.
Using data from eight prominent US pension systems, the PEGCC found that median private equity returns outstripped the S&P 500’s annualised returns for one, five, and 10-year time horizons by 9.1, 7.9, and 8.6 percentage points respectively as of 31 December, according to a release.
The industry group found similar results using the median average of several private equity indices, which also beat the S&P 500 one, five and 10-year horizons by 7.1, 5.7 and 7.6 percentage points respectively, as of 30 September.
The S&P 500 outperformed both the private equity indices’ median returns and the pensions in the three year time horizon, which the PEGCC attributed to the financial crisis, according to a statement.
The PEGCC’s analysis considered returns from some of the industry’s premier LPs, including data from the Florida Retirement System Pension Plan, the Minnesota State Board of Investment, The New Jersey Division of Investment, the Oregon Public Employees’ Retirement System, Pennsylvania Public School Employees’ Retirement System, the Virginia Retirement System, Washington State Investment Board and the Teacher Retirement System of Texas.
“We know that over the last 12 years our private equity portfolio has generated returns that are more than $3 billion higher than if we had invested that money in the public stock market,” Texas Teachers’ private equity head Rich Hall told Private Equity International in a previous interview.
Of course, the PEGCC’s findings reflect returns generated by some of private equity’s largest, or at least high profile, backers. The industry group monitors the top 30 public pension funds and chose pensions that have private equity data available in a comparable format to S&P’s annualised returns, according to a source.
The eight pension systems’ returns reflect their long-standing relationships with top-performing managers – and may not be a reflection of the industry as a whole. For example, the New Mexico State Investment Council’s private equity portfolio also outperforms the S&P 500’s annualised returns, but only by a slim margin compared to the private equity indices and the eight included pensions.
The PEGCC made the announcement announced its findings partially to deflect criticism that private equity firms are only out for profit, and that returns generated by the industry also benefit many US pension systems, according to a statement.
“It delivers higher returns than most other asset classes and helps us meet our obligations to provide retirement income to 1.3 million teachers,” Hall said. “If we didn’t achieve those returns from private equity, where would that $3 billion come from? Teachers? Taxpayers? The federal government?”