Private equity returns are expected to drop below public markets this year due to falling valuations, said a PitchBook report released Friday.
Not including fees, the median private equity return for the six largest publicly traded private equity managers in the first quarter was 2.4%, compared with 7.5% for the S&P 500 index, the report said.
This would be a reversal of a recent trend in which private equity outperformed the S&P 500 between the second quarter of 2020 and the second quarter of 2022, PitchBook said. One reason PitchBook does not expect private equity outperformance to persist in 2023 is that the prior private equity outperformance was driven almost entirely by markups of portfolio companies' net asset values rather than realized returns through distributions to investors, PitchBook found. Not counting cash flows, the average increase of aggregate private equity net asset values over the nine quarters ended June 30 was 7.9%, well above the historic average of 2.5%, the PitchBook report said.
And although private equity outperformed public equity during that period, private equity returns have been on a downward trajectory since high points of 16.3% in the first quarter and 13.6% in the second quarter of 2021, PitchBook data show. Private equity returned 0.9% in the fourth quarter of 2022, the report said.
"Given the deterioration of liquidity for exits, as well as a reset in public markets valuations, we think it is unlikely these private equity markups will ever be fully realized," PitchBook said.