There’s Less to Private Equity Than Meets the Eye
A new study indicates returns are tied more to the bull market than investing acumen.
The alpha is overrated.
Photographer: Andrew Harrer/Bloomberg
When it comes to private equity, governments nationwide and their retirees may not actually be getting what they pay for. That at least is the conclusion of a new study that questions whether pension fund managers’ recent infatuation with private equity is wise.
The study, by three professors from Brigham Young University and one from Ohio State University, found that the big returns investors think they are getting from private equity funds are really just the result of leverage and the bull market. Exclude that stuff, the authors say, and the excess returns provided by private equity funds — commonly called alpha in the investment management business — is “not significantly different from zero.” The same or better return can be achieved just by levering up a typical S&P 500 Index fund. The study found this is essentially true for both buyout and venture capital funds, though it is slightly less true for the VCs.