Study: Pantheon says yes, PE delivers

Research conducted by Pantheon found that top quartile buyout funds performed better than S&P 500 and US mutual funds.

Private equity outperformed both passive and active public equities based on returns from 1990 to 2006, according to Pantheon's “Is Private Equity Delivering?” report.

The research found the top quartile US PE buyouts produced a yearly net outperformance of about 4.9 percent compared with the S&P 500, the passive benchmark, and about 3.7 percent compared with actively managed US mutual funds based on Preqin and Bloomberg data.

The research collected data from 310 Preqin US buyout funds with vintage years between 1990 and 2006 and from 2,641 mutual funds provided by Bloomberg and was conducted by Pantheon research team member Dr. Andres Reibel and global head of portfolio strategy and research Nik Morandi.

“In terms of key highlights, I would say top quartile significantly outperforms, which shows the importance of selecting top quartile managers,” Morandi told Private Equity International. “Also, considering the results from the comparison with the actively managed public equity data set, there is an argument for investors to replace part of their active equity portfolio with private equity.”

“Another key finding is the importance of selecting the right benchmark for assessing PE performance.”

The PE outperformance also applies to lower quartile buyout funds. The study found average funds generated 1 percent of outperformance every year against the S&P 500 and 0.4 percent against the US mutual fund data. Morandi told PEI that another key finding is the importance of selecting the right benchmark for assessing PE performance.

“The answer is really dependent on how the investor views private equity and the features it shares with public equity,” he said. “The other question is whether the S&P 500 is the most appropriate passive benchmark for US private equity given the company size mix of the S&P 500.”

Morandi wrote in a release that private equity allocation “makes sense” when considering passive and active public equities. “The outperformance seen in the study is both consistent and clearly identifiable, especially from top performing private equity managers,” he wrote.