Arun Gupta’s research, drawing on evidence from confidential Securities and Exchange Commission filings, adds to a body of literature highlighting PE’s superior returns. What’s driving that persistent outperformance?
Reji Vettasseri: “There are a lot of factors at play. First, PE firms now own a significant proportion of the world’s highest-quality companies. Then, there is a level of selection advantage in private markets because it is possible to conduct deeper due diligence than in public stocks. There is also a value creation angle. PE firms carry out extensive work to improve the companies that they back. Finally, of course, there is the effect of applying leverage. If you levered the S&P to the same level that buyout deals are typically levered, that would certainly narrow the performance differential, although in today’s market, I think origination and value creation are the more significant contributors.”
Luke Riela: “Private markets are largely illiquid, so you would expect some degree of compensation for that. The other main drivers include the alignment between shareholders and management teams, and the capacity to find unique opportunities in private markets compared with public markets, which have been pretty well picked over. “In addition, PE may carry more risk, as there is more leverage than in public markets. Companies are often smaller too, which makes them more vulnerable to market cycles. Finally, in the past, there has been a significant valuation differential between private and public markets, which would have contributed to outperformance, although that is far less the case today.”
