US stock market beats private equity’s returns for first time

Private equity returns have lagged behind those of stocks in the US over the past decade, the first time that has happened over a 10-year period and a sign of how the industry has struggled to outshine a roaring bull market on Wall Street, a report says.

Investors who have ploughed money into private equity have made an average annual return of 15.3 per cent in the 10 years to June 2019, according to a report from Harvard economist Josh Lerner and the consultancy firm Bain & Co. That compares with the 15.5 per cent they would have made putting the money in the S&P 500, the report found.

The findings come as the industry’s biggest figures, including Blackstone’s Steve Schwarzman and Apollo’s Leon Black, gather in Berlin this week for private equity’s glitzy annual get-together.

“There’s been a huge influx of money into private equity, but when you look at the returns numbers for the last decade . . . it’s hard to feel that there’s really been much alpha at all,” Prof Lerner said. 

The dealmakers gathering in Berlin are grappling with a dilemma created by pension funds, insurers and other investors pouring money into PE funds since the financial crisis. Although the influx of money has buoyed fees, it has also created intense competition deals and fear among executives of overpaying for companies.

The amount of so-called dry powder — money PE firms have raised but not yet spent — hit a high of $2.5tn in December, across all types of funds, the report found.

As the industry gathers for the SuperReturn conference in Berlin, some of the biggest groups are close to striking what may be Europe’s biggest-ever private equity deal, a €16bn move to buy Thyssenkrupp’s elevators unit. 

Two rival consortiums, one led by Blackstone and Carlyle and another led by Advent and Cinven, are in the final stages of talks and Thyssenkrupp is due to make a decision on the sale this week.

Returns of 15 per cent are still “good numbers,” said Brenda Rainey, senior director of Bain & Company’s global private equity practice, who added that it is not easy to compete with a US stock market that has produced “incredible” returns. In Europe, private equity returns still outstripped local public market benchmarks, the report found. 

The buoyant market has led many buyout groups to sell companies and lock in returns, according to the report, which tracks a metric known as “internal rate of return,” which is favoured by the industry but which academics have said can flatter its performance.

“Anyone who had a good asset has likely sold it, partly due to premium prices and partly in anticipation of a recession, when it could be harder to sell,” the authors said. 

While the most successful private equity funds still outperform public markets, the worst offer significantly lower returns.