Graphic: Private equity’s staying power

Institutional investors have warmed to private equity in recent years, pushing up aggregate allocations to the asset class. Endowments and foundations historically have invested more in private equity relative to other asset owners, but other investors are growing their presence, as the returns and portfolio benefits have become hard to ignore.
Public funds join in: Public defined benefit plans have rapidly increased allocations to private equity, while endowments and foundations haven’t kept pace.
The allure: Private equity’s positive returns* are the headline allure, but the asset class also can offer downside protection. Comparisons can be difficult, but in total, private equity has proven more resilient than public equity and recovered more quickly.
Happy returns: Risk premiums aside, the median private equity internal rate of return has outpaced public equity market returns over the same horizon. Weaker IRRs in more recent years can be attributed to fewer realized returns in younger funds.
Picking winners: Manager selection can make or break a private equity allocation. The standard deviation across fund IRRs has been increasing since 2011, meaning the tide isn’t lifting all boats.
*Returns based on Cambridge Associates’ U.S. Private Equity index. **Through March 2018. Sources: Investment Metrics LLC, Cambridge Associates LLC