Can private equity produce excess returns above what is available in the public markets? It’s a question we’re getting from many individual investors as private equity investing opportunities have become more accessible through evergreen products.
In answering this question, we start by looking at historical returns and some of the factors that have driven private equity’s outperformance relative to the public markets over time. We then address why we think private equity is positioned to continue outperforming in the future.
Private Equity has Historically Outperformed Public Markets Across Time Horizons, But Why?
Over the last 25 years, the Global PE Index has outperformed the MSCI World Index by more than 500bps annualized on a net basis1. We think a large component of this outperformance is due to the active role private equity investors play as owners and operators of businesses. They engage deeply with management teams to implement a focused strategy, and they have a long-term approach to creating value. At KKR, we often like to say that our investing philosophy comes down to “buying good businesses and making them great.”
We highlight two important differences in private equity’s approach relative to that of public investors:
Private Equity Managers Directly Contribute to Strategy and Value Creation
- Many public managers try to influence the strategy and direction of companies through informal engagements with management teams, or even going public with their views. However, their influence over day-to-day decisions, strategy and operational best practices is not comparable to that of a private manager owning the business and partnering with management on long-term value creation with full alignment of interests.
Private Equity Managers Are Focused Beyond the Next Quarter
- Because private equity managers are focused on the long-term, they have the patience to undertake strategies and large investments that can take years to bear fruit. While there are several types of public investors, many tend to be more focused on quarterly results and shorter-term performance. Where public investors may exit at any time in favor of other near-term opportunities, private managers are focused beyond the next quarter on helping portfolio companies achieve long-term, durable business performance.
Not surprisingly, then, private equity backed companies exhibit higher growth and better margins, on average, than publicly traded firms (Exhibit 1).
EXHIBIT 1: Revenue and EBITDA Trends in Private Equity-Owned Businesses Compared to Publicly Traded Businesses
