Private Equity

Private Equity Stock Market Returns

How Do Returns on Private Equity Compare to Other Investment Returns?

By 

MARK JAHN

Fact checked by 

YARILET PEREZ

Private equity is an attractive investment option for high-net-worth individuals and institutional investors because of its potential for high returns. Private equity falls under the category of alternative asset classes.

Although its definition is muddled, private equity most commonly refers to a managed pool of raised or borrowed funds. These funds are explicitly used for obtaining an equity ownership position in smaller companies with growth potential. Private equity firms encourage investment from wealthy sources by boasting greater return on investment (ROI) than other alternative asset classes or more conventional investment options.

KEY TAKEAWAYS

  • Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020.
  • Between 2000 and 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital.
  • When compared over other time frames, however, private equity returns can be less impressive.
  • A high degree of risk tolerance and the ability to handle substantial illiquidity are necessary for success in private equity markets.

Historical Returns of Asset Classes

The U.S. Private Equity Index provided by Cambridge Associates shows that private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020.1 During that same time frame, the Russell 2000 Index, a performance tracking metric for small companies, averaged 6.69% per year, while the S&P 500 returned 5.91%.

It is clear that an investor taking a risk with private equity would have received a much higher return than those who chose the more conventional route of investing in an ETF that tracked a popular index. Furthermore, the Cambridge Associates U.S. Venture Capital Index averaged just 5.06% per year between 2000 and 2020.

When compared over other time frames, however, private equity returns can be less impressive. For example, venture capital was the top performer between 2010 and 2020, with average annual returns of 15.15%.

Furthermore, the S&P 500 slightly edged out private equity, with performance of 13.99% per year compared to 13.77% for private equity in the 10 years ending on June 30, 2020. On the other hand, that was still better than the 10.50% average annual return of the Russell 2000 during that time.

Sources:

  1. Cambridge Associates, LLC. “U.S. Private Equity Benchmarks (Legacy Definition) Q2 2020 Final Report,” Page 8.
  2. Cambridge Associates, LLC. “Cambridge Associates Venture Capital Benchmarks Q2 2020 Final Report,” Page 7.



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