November 16, 2018
November Chart of the Month
Many would agree that the single most important premise on which the hassle and expense of investing in PE has been its assumed outperformance over the public markets. Lately, though, that premise has been called into question. Some data shows PE’s outperformance waning. PE’s lack of meaningful outperformance over shorter time periods has been getting a lot of attention these days. This is causing LPs to increasingly ask themselves if the high fees and illiquidity justify an allocation to the private markets.
Outperformance: What the Data Says
Never ones to shy away from a contrarian point of view, we decided to take a look at the cold, hard data for ourselves. We analyzed the portfolios of 30 public pension plans with more than $10 billion in assets. The chart below depicts performance over the 1-, 5-, and 10-year time periods in each of the 30 unique portfolios. If a dot is above the line, the plan’s private markets portfolio outperformed its public equity benchmark. If a dot is below the line, the public equity portfolio has outperformed that of the private markets.
You can look at this data in two ways. The chart clearly shows that there is a wide dispersion of returns in the private markets. This means that good choices can lead to outperformance of both peers and averages. It also shows that over the 1-year period, few private markets portfolios have been able to keep up with their public counterparts. Over the 5-year period, not enough have done so. Private markets investors are well aware that they’re in a long-term asset class. Still, they can’t help but look at the short term. If underperformance persists over the next few years, we wonder what this will mean for discussions around altering traditional structures of the private markets, such as fee structures and allocation.
However, we’ve long supported the importance of looking at data in context. Perhaps the skeptics and PE doubters are correct about narrowing performance. But maybe, the public markets, particularly in the U.S., have been unusually strong for an unusually long period of time. And still, with good selection, this chart displays that PE continues to offer the opportunity to outperform its benchmarks. Another key element of this analysis is that as average private markets outperformance is narrowing over the 10-year time period, the portfolios included in this analysis generated an average 400+ basis points of outperformance relative to their public market portfolios. Now, that is a healthy premium and something we think all LPs would like to achieve in their private markets programs.