Does private equity deliver outperformance? It’s a question that drives at the heart of the industry’s claims that outsized returns are worth the fees.

It’s also a question that came to the fore in 2020, spearheaded by one of private equity’s loudest critics. In June, Ludovic Phalippou, professor of financial economics at the University of Oxford’s Saïd Business School, published what he said would be his last word on the private equity performance debate in a 34-page study titled An Inconvenient Fact: Private Equity Returns & The Billionaire Factory.

The report concludes that rather than outperforming the market, private funds have, after fees, returned about the same as public equities since 2006. These funds have produced an estimated $230 billion of carry for a handful of investment professionals, lined the pockets of advisors, lawyers and consultants, while failing to deliver alpha, Phalippou argued.

“This wealth transfer might be one of the largest in the history of modern finance: from a few hundred million pension scheme members to a few thousand people working in private equity,” he concluded.

Perhaps it was the attention given to it by some in the mainstream financial press, or perhaps because it was published during a year when the private equity industry was under the spotlight for receiving state aid for portfolio companies disproportionately affected by the coronavirus pandemic. Either way, the paper caused a stir, with GPs including Blackstone, KKR, Carlyle and Apollo Global Management providing rebuttals to the paper, and Phalippou issuing public calls for industry figures to debate him on the subject – the only person to accept the challenge being David Robinson, professor of finance at Duke University’s Fuqua School of Business.

Private Equity International has, over the years, devoted much attention to the question of net returns and outperformance. One fresh point that Phalippou highlighted in his 2020 report was the suggestion that trustees, investment teams, external managers and consultants are unable to see the problems with private equity because their livelihoods may depend on them not seeing it. Professionals working within private equity teams at institutional investment organisations are not, the argument goes, incentivised to suggest that private equity is an asset class that can often fail to deliver outperformance.

While it’s important to acknowledge that such a vested interest is of course present, we know that investors who spend their time day-in day-out making private equity investment decisions are as well-versed as any when it comes to thinking about the value of the asset class.

“No matter how I slice and analyse our portfolio, I find that over time private equity gives a 200-300 basis point kick,” the head of alternatives at a European pension fund with around $4.5 billion invested in the asset class told PEI in June. Other LPs highlighted private equity’s role as a less volatile asset class than public markets and an important diversifier.

Phalippou may have said his last word on the great performance debate, but it’s likely others will take his place in 2021 and beyond. As the impact of the pandemic puts stresses on investors, portfolio companies and ultimately returns, the private equity industry will have to continue to work hard to justify its licence to operate. As we and other industry participants have long argued, greater discloser and more transparency around performance and fees will become even more crucial.

– Rod James contributed to this report.