Apollo Global Management founder Leon Black and others are touting private equity's consistent outsized returns, but some insiders — including investors — are not so sure.
So, if private equity returns are not expected to be stellar and the asset class is not proving to be a diversifier, what are investors getting for their $2.3 trillion private equity investment?
The answer depends on whom you ask.
“It's the only asset class” that will provide the 8% annual rate of return needed by pension funds to meet their long-term forecasts, Mr. Black said in an interview.
Scott Sperling, co-president of Boston-based Thomas H. Lee Partners, says private equity has outperformed stocks for 22 of the last 24 years.
Believing in the outsized return and diversification potential, investors have been piling into private equity. As of year-end 2009, private equity firms worldwide had $1.2 trillion in combined assets and $1.1 trillion of capital waiting to be spent, up from $870 million total private equity assets under management in 2003, according to Preqin, a London-based alternative investment research firm.
But not everyone agrees that private equity delivers what its promoters promise.
Publicly traded stocks are a better buy, according to Harold Bradley, chief investment officer of the $1.8 billion Ewing Marion Kauffman Foundation, Kansas City, Mo.
Stocks have outperformed private equity, venture capital and hedge funds over the long haul at a fraction of the cost, Mr. Bradley said during a panel discussion in April at the Milken Institute Global Conference in Beverly Hills, Calif.
Mr. Bradley is not alone in his assessment.
If an investor analyzes stocks the same way as private equity — on an internal rate-of-return basis — the performance between the two classes would not be all that dissimilar, said another institutional investor who declined to be identified.