It's a scary time to be a private equity investor, with the market near its peak, high prices and expected lower returns, said speakers at this year's Pension Bridge Private Equity Exclusive conference.
Private equity might not be at its cyclical peak, "but it's at a pretty high point," Steven Kaplan told the crowd attending the conference in Chicago, July 24-25. Mr. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.
The closer the private market is to the high side of the cycle, the less likely private equity funds will beat the stock market, he said; and private equity is closing in on the high side of its cycle. "I would be staying awake at night," he said.
And there's a lot of money invested in private equity, Mr. Kaplan noted. Between 1997 and 2005, private equity mostly outperformed the S&P 500, with the exception of the 2006-'08 period when performance was similar, according to the Kaplan-Schoar private market equivalent, which measures private equity performance compared to the S&P 500. Since 2009, private equity has earned better returns than the S&P 500.
It's a different story when it comes to whether general partners are able to repeat their performance. Managers of top-quartile funds can have sustainable returns some of the time, Mr. Kaplan said, but not a lot of the time. Bottom-quartile managers are most likely to persistently have bottom-quartile returning funds.
What's more, except for the bottom quartile, there is not much difference in the performance of managers' current funds, when they go out to raise new funds, Mr. Kaplan said.
The new funds of firms with top-quartile prior funds will not necessarily also be top performers, Mr. Kaplan said.