Private equity returns for many asset owners are failing to outperform their benchmarks over several time periods, and some observers are wondering whether investment in the asset class is worth it.
“There's been a lot of hand-wringing about returns,” said Andrea Auerbach, managing director, head of global private investment research of Cambridge Associates LLC in the Menlo Park, Calif. office. “Where is performance really going?”
“I don't think private equity on a risk-adjusted basis provides an appropriate return,” said Jeffrey Hooke, senior lecturer at the Johns Hopkins Carey Business School, Washington.
In the coming year, the $306.6 billion California Public Employees' Retirement System, Sacramento, will be investigating whether private equity's performance justifies its illiquidity and fees as part of a study of all of the risk-return scenarios of its investments, spokeswoman Megan White said in an email.
CalPERS' $26.4 billion private equity portfolio underperformed the pension fund's private equity benchmark in all but two time periods ended June 30 — the one-year and 20-year periods. However, it outperformed, in all but the most recent one-year period, the pension fund's static long-term return expectation of 9.3%.
“Private equity is by nature a very long-lived asset class, meaning it makes sense to evaluate its performance over long periods of time — 10 years or more,” Ms. White noted.
Despite the concerns, institutional investors are not turning their backs on the asset class.
General partners have been warning investors not to expect the same performance they had come to know, but most firms have had no trouble raising capital.
Some 807 global private equity funds raised a total of $345 billion in 2016, according to preliminary numbers from London-based alternative investment research firm Preqin. When the final numbers are tallied, Preqin expects the total capital raised will amount to 10% more, which would be a record since the fundraising boom years of 2007 and 2008. Half of the funds raised last year exceeded their target.