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Quarter-End Insights

Private Equity: PE Outperforms and Closes the Valuation Gap

Private equity performance is primed to improve relative to public equities as multiples between public and private markets converge.

  • Private equity tends to outperform in periods of falling public equity prices, having done so in 19 of the 20 quarters since 2001 in which public equities registered negative returns.
  • PE is highly correlated to public equities, meaning absolute returns in recent periods and the near term will probably be lower than in years of a booming public equity market.
  • PE funds recorded healthy gains in the first quarter of 2018 while public equities lagged in an increasingly volatile market. The gap in enterprise value/EBITDA multiples shrank to the lowest level in four years.

Our recent research has corroborated previous findings that private equity funds are more correlated to public equity markets than conventional wisdom would lead many investors to believe. To assess the correlation, we created a "PE index" by calculating the aggregate percentage change in net asset value for each group of funds in a sample, considering contributions and distributions during the quarter. The PE index had a correlation of 0.75 with the S&P 500 since 2001 and 0.84 since 2008. In light of this and the tumultuous year for public equities in 2018, our initial inclination was that private market strategies would follow a similar downward trajectory. Our hypothesis changed, however, when examining the data more closely. We think returns will remain solidly in positive territory, though we still believe that absolute returns for PE funds will fall throughout reporting periods in 2018. Furthermore, we anticipate performance relative to public equities to increase.