Private equity: what do we know?

Over the last few years, there has been a heated debate regarding the role of private equity. Many even wonder what the private equity sector actually does. Do private equity investments generate excess returns? Does private equity create value or take away jobs? If it takes away jobs, is this a value reduction or an increase in operational efficiency? Is there performance persistence in individual private equity funds?

To answer and discuss some of these heated questions, on September 23rd Professor Steven Kaplan, leading expert on private equity and professor at the University of Chicago took the stage at SHoF. Professor Kaplan provided the audience with a thorough overview of the industry with compelling empirical evidence of the performance of private equity over the last 15-20 years. Kaplan discussed the public market equivalent (PME) a performance measure he suggested several years ago with Professor Antoinette Schoar from MIT. Using the PME which discounts with public market rates, private equity investments seem to robustly perform at return multiples much higher than public markets at a multiple of roughly 1.2 over a larger time horizon (1.0 would imply performance similar to equity markets). Kaplan also discussed recent work on performance persistence in top performing private equity funds leading the discussion towards relevant topics for asset allocators.

“The LP (limited partner) community has come a long way when it comes to thinking about these things” stated Joakim Karlsson, partner at Nordic Capital and seminar discussant for Steven Kaplan’s review of the private equity industry. During Karlsson’s discussion, the topics turned towards the importance of sector selection and the emergence of operational engineering as part of a modern toolkit for private equity. Many audience members were interested in the role of competition and concerns of whether performance persistence in private equity funds may still be possible. Some might say that the jury is still out, but Professor Steven Kaplan provided very compelling evidence of the value of private equity investing.