Delusional expectations of private equity investors

The Globe & Mail has a brief story on the high expectations of private equity investors (refer to the article for the link to the study):
With returns in other asset classes depressed, almost two-thirds of investors surveyed by research firm Preqin say they expect private equity managers to post returns that trump public markets by at least 4.1 percentage points. Three years ago, that number was 17 per cent.

A further 23 per cent in the latest survey said they expected at least 2.1 percentage points over public markets returns.

Given what some studies have shown, that seems a lot to ask.

A recent study by London Business School Professor Chris Higson concluded that investors get "at best a market return."

Mr. Higson looked at returns from 1980 to 2005. His conclusion was that only about a quarter of funds outperformed, while the rest underperformed.
The survey appears to have sampled over 100 private equity investors—sample size is reasonable—and it seems many have rose-coloured glasses. Beating the market by 4.1% in one year, which is what the study is quoted as saying, is within reach; but if investors are expecting private equity to beat the market by 4.1% in the long run, forget about it. They would be lucky to beat the market by 1% in the long run.


  1. Returns that investors seek from this part of their portfolio is a reflection of the risk that they feel it brings. In order to make it wrth investing, they must be getting returns in excess of 4% as they are seeing PE as high risk right now. It's not saying that these investors are expecting their existing portfolios to achieve this right now. The fact that fundraising has pretty much collapsed in 2010 is a reflection of the fact that investors are not confident that they can find funds which will give them this kind of return. If it was a reflection of how great PE investors thought PE was, then fundraising would be through the roof!


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