The publication of Professor Ludovic Phalippou’s report on private equity returns (“An Inconvenient Fact: Private Equity Returns & The Billionaire Factory”) has done more to generate selective headlines than it has to contribute to a body of rigorous or impartial research. Many assumptions used in the study (reported in your article “Private equity barons grow rich on $230bn of performance fees”, June 14) are methodologically flawed and fail to reflect the true long-term outperformance of private equity and its clear benefits for institutional investors, including pension funds, insurers and sovereign wealth funds.
The study and recent press articles have homed in on large US buyout firms’ performance relative to the S&P 500 over a 10-year period. In so doing, the comparison includes a high proportion of companies held in portfolios that are still to be realised at their full value and potential. However, over the long timeframes that really matter to private equity investors, private equity consistently outperforms public stock market indices. Over 15, 20 and 25 years, when investments have been realised, US private equity has returned between 350 and 600 basis points more than the S&P 500 net of fees.
Both the paper and articles also do a great, and continued, disservice to readers by seeking to equate US buyout funds with the term “private equity”, a global asset class that encompasses venture capital, growth capital and small, mid, large and mega buyout funds. Simply put, short-term timeframes do not capture the full performance of private equity. It is only by looking at investment over the long term — reflecting the commitment of savers’ contributions today to fund their retirements tomorrow — that the true performance becomes clear.
That is the reason why private equity fundraising strengthened again in Europe last year to €109bn, the highest level since the financial crisis. Institutional investors understand private equity’s rewards — as well as its risks — and continue to make it a core part of their investment portfolios.
Eric de Montgolfier
CEO, Invest Europe,
Letter in response to this letter:
A name to conjure with in a puffed-up industry / From Peter Breese, Simorre, France
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