Study: PE outperforms public markets in downturns

The private equity model ‘follows an anticyclical trend to that of stock markets’, according to research from Golding Capital Partners.

Private equity investments outperform comparable public market investments to a greater degree during “difficult market phases…when companies are in greatest need of support”, according to recent research by Golding Capital Partners and Oliver Gottschalg of Paris-based HEC School of Management.

The study, which analysed over 4,200 realised private equity transactions, found that the private equity model “can better absorb downturns”, as private equity’s outperformance “follows an anticyclical trend to that of stock markets”.

The report also calculated that private equity investments from “established” managers generate an average excess return of 5 percent compared with public market investments.

While the specific year of investment was decisive for driving outperformance, the size of companies receiving investment, specific industry and whether businesses were located in the US or Europe did not carry significant influence on outperformance, the report said.

One media outlet criticised the study for not including in its data set managers that failed, and for ignoring factors such as “risk, liquidity and a market structure which often gifts big names sweet-priced deals”. These criticisms, however, do not discredit the report’s findings, according to Gottschalg.

“This data set is by no means an unbiased data set,” Gottschalg told Private Equity International. “This is not a study meant to answer the question, ‘How does private equity perform on the average?’” he said. “This is a study meant to answer the question, ‘How does private equity performance vary across economic cycles?’”.

Specifically, the study tries to “understand how the performance of a realised deal compares to stock market movement over its holding period,” Gottschalg said. “The interesting finding is that we can show that during a downturn, very systematically private equity delivers alpha.”

German fund of funds Golding Capital Partners’ transaction database encompasses principally Europe and the US between 1977 and 2010.