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Historical data shows that private equity’s outperformance increases during distressed periods.

Private equity (PE) has seen an influx of investors in recent years, many of whom are new to the asset class. In fact, 2018 marked the first year that more capital was raised through the private markets than the public markets, prompting some noteworthy consultants to conjecture that we’re in the middle of one of the most profound shifts in the capital markets since the 19th century.
The reason for this heightened investor interest is simple: Private equity acts as a portfolio diversifier and has generated strong historical returns at a time when growth has become increasingly hard to find. Private equity’s consistent long-term outperformance against major indices is well-documented, with the asset class generating 597 basis points of outperformance over a 20-year period and 489 basis points over a 15-year period versus the S&P 500.1

Private equity has outperformed public markets during recessions

We are, however, in the eleventh year of the longest bull run in history and, as concerns rise over an eventual downturn, it’s natural for investors to ask how private equity will perform in a recession. Significant historical data shows that private equity’s outperformance actually increases during distressed periods.

One of the more interesting reports on this subject was generated by Cliffwater,2 which examined PE investment programs at U.S. state pension plans over the 16-year period ending June 30, 2016 (encompassing two bear markets and two bull markets). During this period, PE outperformed public equities by 440 basis points annually on average across the 21 pension plans studied (Exhibit 1).

These strong relative returns were even more pronounced during bear markets than in years of economic growth.3 When the broader economy was stronger, private equity outperformed by an average of 290 basis points; however, during weaker economic times, this increased to 660 basis points. An analysis of median net IRRs of U.S. buyout funds across vintages confirms private equity’s outperformance during economic downturns (Exhibit 2). In fact, we found that the asset class generated some of its strongest returns in recession-year vintages, including 2001, 2002, and 2009.

chart - some of PE's strongest vintages began investing during downturns

Private equity funds may be less risky than stocks

Data from Hamilton Lane and J.P. Morgan further supports private equity’s ability to weather downturns.4 J.P. Morgan analyzed the Russell 3000 Index (which represents approximately 98% of the investable U.S. equity market) between 1980 and 2014. They found that during recessions, two-fifths of publicly listed equities have experienced “catastrophic loss,” defined as a 70% or greater drop from their peak values. Yet less than 3 out of 100 private equity funds have suffered a similar loss (Exhibit 3). When examined from this perspective, stocks are 13 times riskier than private equity funds. PE’s lower volatility relative to public markets is also apparent when comparing index performance over time (Exhibit 4).

chart--PE has demonstrated a lower risk of catastrophic loss

chart - PE has been less volatile than public equities

Given this analysis, investors turning their thoughts to portfolio construction ahead of the next downturn may want to consider adding a private equity allocation, not only for its outperformance potential, but also for its lower volatility potential.

In our next blog, we’ll examine why PE has outperformed during downturns. For more on this topic, download our white paper, Private Equity Offers Resilience in a Downturn.

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1) Cambridge Associates, US Private Equity Index and Selected Benchmark Statistics, Q1 2019.
2) Cliffwater, "An Examination of Private Equity Performance among State Pensions, 2002-2017," updated May 2018.
3) The study notes 2002-03 and 2008-09 as the bear market years.
4) Hamilton Lane Market Overview 2017/2018.


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Nick Veronis

Nick Veronis

Nick is Co-Founder and one of the Managing Partners of iCapital, where he is Head of Fund Management. He is also a member of the company's Operating Committee. Nick spent 11 years at Veronis Suhler Stevenson (VSS), a middle market private equity firm where he was a Managing Director responsible for originating and structuring investment opportunities. He holds a BA in economics from Trinity College and FINRA Series 7, 79, and 63 licenses. See Full Bio.

Tatiana Esipovich

Tatiana Esipovich

Tatiana is a Senior Vice President on the Investment Products and Research team at iCapital, focusing on private capital strategies. Prior to joining iCapital in 2017, Tatiana worked at DB Private Equity (part of Deutsche Asset Management) in New York. Tatiana started her career at Deutsche Bank in London. She received an MA in Modern Languages from Oxford University.