Private equity outperforms traditional equity at large public pensions

A new study from a U.S. investment consulting firm found that private equity performance over a nearly 20-year time horizon accounted for a 4% annualized excess return over public equities. The data set collected by Cliffwater centered on returns generated by large state pension systems over a 19 fiscal year period from 2001 through 2019. Most of the pension funds included in Cliffwater’s study have a private equity performance aim of outperforming public equity by a set percentage – for instance 3% net of all fees. The equity index used to represent public equity varies but can be the S&P 500 index or the Russell 3000 or even the MSCI ACWI ex-US index. The finding over the 19-year study period was 5.6% annualized return earned by the public equity benchmark, while private equity allocations produced a 9.6% annualized return. Stephen Nesbitt, founder of the firm, said the data is different from general return data on individual private equity funds which ignores selection, weighting, co-investment, and other decision factors that state pensions make in managing a private equity portfolio. “Private equity has consistently been one of the strongest performing asset classes within state pension portfolios, a characteristic we expect to continue,” wrote Nesbitt in the report. The study’s findings dispute the idea that private equity returns currently have failed to deliver excess return over equities as they did in years past. Using a simple regression analysis, Cliffwater found that private equity excess returns across time were unwavering no matter how well the market has performed. Cliffwater’s data was from annual financial reports published by 94 state pension systems. Narrowing down to systems reporting over same time periods and across all 19 fiscal years, the consulting firm reported that the total value of all private equity covered in the study equaled $282 billion, representing 10.2% of $2.8 trillion in total assets held by 53 state systems. The study period was selected due to its coverage of two full market cycles, encompassing two bear markets (fiscal years 2001-03 and 2008-09) and two bull markets (fiscal years 2004-07 and 2010-19).

Private equity outperforms traditional equity at large public pensions

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