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Capital Markets

The private equity paradox

www.breakingviews.com

Private equity has a reputation among investors for offering high returns at the cost of high risk. That view is only half right, and the part of it that is wrong is perhaps surprising. The funds are relatively high-risk investments but the returns have not been nearly as impressive as is commonly supposed.

That is the conclusion reached by several academic studies. They use different techniques to measure and compare but they mostly come to the same conclusion: private equity lags the stock market.

The most comprehensive study, by three researchers at business school Insead, shows that the average performance of 1,208 mature funds lagged the stock market by 14%.1 Another study, published by the US-based National Bureau of Economic Research, came up with underperformance of 3% to 4%.2 Moreover, the studies show that this underperformance does not vary much by type of asset. Leveraged buyout funds and venture capital funds have provided about the same returns.

It is not just academics that take a dim view of private-equity returns. Industry consultants are also gloomy. For example, the US National Venture Capital Association finds a 20-year average annual return of 12.7%,

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