Correcting the Record - Private Equity Has Outperformed for Pension Funds and Other Investors

The American Investment Council (AIC), the trade group for the private equity industry, published a rebuttal to an article by Professor Ludovic Phalippou that questioned private equity performance and disclosure. The AIC states that private equity has consistently outperformed public equity markets across market cycles, delivering what it describes as hundreds of billions of dollars in net gains to pensioners, non-profits, endowments and other investors. It cites its own 2019 Public Pension study, which reported a median 10-year annualized net return of 10.2 percent for private equity versus 8.5 percent for public equity.

The rebuttal draws on several research sources. It cites a 2019 paper by Professors Steven Kaplan and Gregory Brown finding that U.S. buyouts have historically outperformed the S&P 500 by a fairly wide margin, and that recent convergence in returns following the Global Financial Crisis was likely driven by the immature nature of those vintages. A 2020 Cliffwater study of state pension performance for fiscal years 2001-2019 found private equity produced a 9.6 percent net annualized return versus 5.6 percent for the public equity benchmark. A 2018 Georgetown University study was also cited, estimating that target date funds with private equity allocations could raise retirement income. A McKinsey report was cited for the finding that mega funds have on average delivered the highest returns over the past decade.

The AIC contends that the S&P 500 is not a representative benchmark, because its heavy weighting toward large US technology stocks, which it says represent around 20 percent of the index, does not reflect a typical diversified private equity or institutional public equity portfolio, and it argues the MSCI World Index is more appropriate. It also disputes Phalippou's use of the 2006 vintage as a starting point, calling it one of the lowest-performing in recent history. On risk, it cites Hamilton Lane and JPMorgan Asset Management research finding a 2.8 percent probability of catastrophic loss (a decline of 70 percent or more) for a buyout fund during a recession, versus 40 percent for a public equity investment.

On investor satisfaction and disclosure, the AIC cites a 2020 Preqin report finding 87 percent of investors said their private equity investments met or exceeded expectations. It also rejects claims that pension officials lack full performance information, and says carried interest is paid only after a preferred return and that many large limited partners negotiate management fee discounts, contrary to Phalippou's fee assumptions. The AIC's figures are presented as its own rebuttal and have not been independently verified in this account.