Private Equity vs. Listed Stocks: What Do 20 Years of Performance Really Reveal?

This trend is not merely a passing fad. It reflects a profound transformation in the way investors build their portfolios and seek sources of long-term value creation.

At the same time, stock markets have remained one of the pillars of global investing. Liquid, transparent, and accessible, they allow investors to invest in thousands of publicly traded companies around the world.

Does this mean that private equity is a better asset class than publicly traded stocks? The answer is more nuanced.

Historical data published by Cambridge Associates, France Invest, and MSCI show that certain private equity strategies have historically generated annualized returns that exceed those of several major equity indices over long periods. But these results tell only part of the story.

Comparing private equity to publicly traded stocks is not simply a matter of comparing two returns. It involves comparing two investment universes that differ in terms of holding period, liquidity, valuation methods, governance, and value creation mechanisms.

This article aims to analyze what twenty years of historical data actually reveal, the reasons behind the observed differences, and the methodological limitations that should be kept in mind before making any comparisons.

Why don't institutional investors view private equity and publicly traded stocks as mutually exclusive anymore?

When a retail investor learns about private equity, they often ask a simple question: “Does private equity yield higher returns than the stock market?”

That's a fair question. However, it doesn't reflect the way institutional investors think.

For a pension fund, a university endowment, or an insurance company, the real challenge is not choosing between public and private markets. It lies in building a portfolio capable of meeting several objectives simultaneously: seeking returns, managing risk, diversifying sources of value creation, and financing very long-term commitments.

In other words, private equity is generally not viewed as a substitute for publicly traded stocks, but rather as a complementary component of a diversified asset allocation.

This logic explains why the world's largest investors continue to invest heavily in both sectors.

Two Different Ways to Invest in Business Growth

At first glance, publicly traded stocks and private equity share a common goal: to finance the growth of companies.

In both cases, the investor hopes to benefit from economic growth, improved corporate profitability, and the value created over time.

The difference lies in how this value creation is captured.

In listed markets, investors purchase shares whose prices fluctuate daily based on financial market expectations.

In private equity, investors indirectly participate in the financingof unlisted companies, which are typically supported for several years by a management firm that plays an active role in their development.

This fundamental difference explains why the performance of the two asset classes cannot be analyzed solely in terms of return.

Two Investment Philosophies

Listed markets offer a great deal of flexibility. Investors can adjust their positions on a daily basis based on their expectations or market conditions.

Private equity operates on a very different model. Capital is committed for several years to give companies time to implement their growth strategy.

This liquidity constraint often poses a challenge for some investors. For others, particularly institutional investors with very long-term commitments, it is, on the contrary, a characteristic that aligns with their investment horizon.

What do twenty years of historical data actually reveal?

Comparisons between private equity and publicly traded stocks are regularly the subject of studies published by organizations such as Cambridge Associates, MSCI Private Capital, and France Invest.

These analyses show that, historically, certain private equity strategies have generated annualized returns that exceeded those of several major equity indices over long periods.

This observation is well documented. However, it should be interpreted with caution.

What the Cambridge Associates studies show

Cambridge Associates' research is one of the most widely used sources of information by institutional investors.

For several decades, their US Private Equity Index & Benchmark Statistics has compared the performance of U.S. private equity funds with that of the major stock indices.

Historical Performance of U.S. Private Equity Compared to Public Markets (Cambridge Associates)

The various editions of this study consistently highlight the historical outperformance of buyout strategies over ten-, fifteen-, or twenty-year time horizons, depending on the periods examined and the methodologies used.

This historical outperformance partly explains why private markets now play a significant role in institutional asset allocations.

However, these results should not be interpreted as a guarantee of future performance. They reflect historical data that depends, among other factors, on the vintages studied, the strategies employed, and the economic conditions observed.

Why Numbers Don't Tell the Whole Story

Comparing two annualized returns is relatively simple.

Comparing two asset classes is much more complex.

Publicly traded companies are continuously valued by the market. Their prices instantly reflect investors' expectations.

In private equity, valuations are based on specific methodologies and are conducted at regular intervals in accordance with international standards such as the IPEV Guidelines.

In addition, private equity investors generally accept a longer investment horizon and lower liquidity than in public markets.

In other words, a meaningful comparison cannot be limited to a single column labeled “performance.” It must take into account all the characteristics specific to each investment universe.

Private Equity and Listed Stocks: A Comparison That Goes Beyond Returns

Before even analyzing the reasons behind private equity’s historical performance, it is worth noting that these two asset classes operate on different principles.

This comparison highlights a key fact: return is just one factor among many in the evaluation of an asset class.

For institutional investors, the way in which this performance is achieved, the level of risk accepted, and the role played in the overall portfolio construction are just as important.

Why has private equity historically created more value?

It is not enough to simply point out that, according to certain historical studies, private equity has outperformed public markets. The real question is: why?

Contrary to popular belief, this difference cannot be explained solely by the fact that these companies are not publicly traded. It stems from a set of mechanisms that characterize the very nature of private equity.

Research by Bain & Company, McKinsey, and Cambridge Associates shows that value creation in private equity generally relies on several complementary factors: operational support for companies, active governance, a longer investment horizon, and a particularly strong commitment to execution.

Value creation begins long before the company is sold

One of the main differences between a publicly traded investor and a private equity fund lies in the degree of their involvement.

In the financial markets, a shareholder buys a stake in a company that is already publicly traded. Even when a shareholder is convinced of the company's potential, their influence over strategic decisions is generally limited.

In private equity, the approach is different.

Management firms work alongside executives for several years to accelerate the company’s growth. They are often involved in major strategic decisions, such as international expansion, acquisitions, hiring key personnel, digital transformation, financial restructuring, and improving operational processes.

In other words, value creation does not depend solely on market trends. It also results from the changes implemented within the company.

According to Bain & Company, growth in operating income has historically been one of the main drivers of value creation in buyout transactions, ahead of the effects associated with changes in valuation multiples.

Private markets provide access to a portion of growth that has become inaccessible on the stock market

The global economy has undergone profound changes over the past twenty years.

In the 1990s, companies went public relatively early. As a result, a large portion of their growth was accessible to investors in the public markets.

Today, the situation is different.

Many companies remain privately held for much longer. They raise capital from venture capital, growth equity, or buyout funds before, in some cases, considering an initial public offering.

Companies such as Stripe, Databricks, and Canva have reached valuations in the tens of billions of dollars even though they were not yet publicly traded.

This trend has an important consequence: a significant portion of value creation now occurs before the initial public offering.

Private equity specifically provides access to this stage of development, which remains largely inaccessible to investors active solely in public markets.

More Active Governance

Companies backed by private equity funds often have a different governance structure than that of publicly traded companies.

Boards of directors are generally smaller, and communication between executives and investors is more frequent.

This proximity facilitates decision-making and allows for the faster implementation of certain strategic changes.

This is not to say that this approach to governance is inherently superior. It simply follows a different logic, one that is more focused on operational execution over a period of several years.

The Discipline of the Long Term

One of the paradoxes of private equity is that its main drawback—illiquidity—is also one of its strengths.

A fund is not intended to rebalance its portfolio on a daily basis.

Investments are made with a multi-year perspective in mind, which gives companies the time they need to carry out their development plans.

This approach naturally reduces the impact of daily fluctuations in the financial markets on strategic decisions.

It also allows the company to focus its efforts on creating fundamental value rather than on fluctuations in its stock price.

Why do institutional investors continue to increase their exposure to private equity?

While historical performance explains part of the interest in private equity, it is not enough to understand why this asset class now plays such an important role in institutional portfolios.

Professional investors rarely think in terms of pitting one asset class against another.

Above all, they seek to build portfolios capable of withstanding various economic conditions.

A Strategy of Diversification

Private equity provides exposure to companies, sectors, and business models that are not always represented in public markets.

For an institutional investor, this diversification can help limit reliance on a single source of returns.

This approach explains why private equity is generally used to complement listed stocks rather than as a substitute for them.

A vision consistent with very long-term commitments

Pension funds, insurance companies, and sovereign wealth funds often manage liabilities that span several decades.

In this context, tying up a portion of the portfolio for several years is not necessarily a constraint.

On the contrary, this characteristic may be consistent with their investment objectives.

This is one of the main reasons why institutions such as CPP Investments in Canada, GIC in Singapore, and major U.S. university endowments allocate a significant portion of their assets to private markets.

Wide variation in performance

Private equity has one key characteristic: performance differences among fund managers are much greater than in public markets.

Academic research shows that the selection of management teams is one of the key determinants of performance.

In other words, investing in private equity is not just a matter of choosing an asset class.

It is also a matter of selecting portfolio managers who are capable of identifying the most promising companies, supporting them in their growth, and creating sustainable value.

This dispersion explains why institutional investors devote significant resources to selecting and monitoring their partners.

Can private equity and publicly traded stocks really be compared?

The answer is yes… but only if you understand the limitations of the exercise.

Simply comparing two annualized returns would be an oversimplification.

Listed stocks offer daily liquidity, continuous pricing, and immediate transparency.

Private equity operates on a different model: periodic valuations, a long-term investment horizon, low liquidity, and operational involvement by investors.

These differences explain why comparisons should be interpreted with caution.

As Cambridge Associates points out, historical results depend, among other things, on the indices selected, the time periods considered, the strategies analyzed, and the methodologies used.

Past performance is therefore a factor in analysis, but it does not predict future performance.

What Twenty Years of History Really Teach Us

At first glance, historical performance data might suggest that private equity is simply a higher-performing version of the stock markets. However, this interpretation would be incomplete.

Institutional investors are not increasing their exposure to private equity simply because certain historical studies show superior performance. Above all, they are seeking a combination of characteristics that is difficult to find in a single asset class: access to unlisted companies, active support for management teams, levers for creating operational value, and diversification that complements public markets.

In other words, the real lesson of the past twenty years lies not solely in the returns observed. It lies in the changing way investors construct their portfolios.

Today, the largest institutional investors no longer view public and private markets as mutually exclusive. They consider these two sectors to be complementary.

Listed stocks provide access to daily liquidity, broad diversification, and immediate exposure to the global economy. Private equity, on the other hand, offers access to unlisted companies, longer-term value creation horizons, and operational support strategies that differ significantly from those of public markets.

This complementarity explains why private equity allocations have gradually increased within major institutional portfolios over the past two decades.

It should be noted, however, that this trend does not mean that private equity is a suitable option for all investors. Its investment horizon, level of liquidity, and inherent risks must be evaluated in light of each investor’s financial goals, financial situation, and ability to tie up capital over the long term.

Key Takeaways

• Historical data published by Cambridge Associates, France Invest, and MSCI Private Capital show that certain private equity strategies have historically generated annualized returns that exceed those of several major equity indices over long periods.
• These historic results stem in particular from value-creation mechanisms specific to private markets: operational support for companies, active governance, external growth, and a long-term vision.
• However, comparisons between private equity and publicly traded stocks should be interpreted with caution. Differences in liquidity, valuation, methodology, and risk profile make any direct comparison imperfect.
• Institutional investors generally use private equity as an asset class that complements public markets, with a view to diversification rather than substitution.
• The selection of management firms is one of the key determinants of performance in private equity. The performance gaps between the top managers and the market average can be significant.

FAQ on Private Equity and Listed Stocks

Has private equity historically outperformed publicly traded stocks?

According to several studies published by Cambridge Associates and France Invest, certain private equity strategies—particularly buyout funds— have historically generated annualized returns that exceed those of several major equity indices over long periods. However, these findings depend on the time periods studied, the methodologies used, and the strategies analyzed. They do not constitute a guarantee of future performance.

Why do institutional investors invest so much in private equity?

Institutional investors pursue several complementary objectives: gaining access to unlisted companies, diversifying their portfolios, benefiting from value drivers that differ from those of listed markets, and investing over a time horizon consistent with their long-term commitments.

Is private equity riskier than publicly traded stocks?

The two asset classes involve different risks.

Private equity is characterized, in particular, by a higher risk of illiquidity, longer investment horizons, and less frequent asset valuations. Listed stocks offer greater liquidity but are subject to higher day-to-day volatility.

Comparing the two therefore requires analyzing all of their characteristics, not just their performance.

Why do performance results vary so much among private equity funds?

Private equity is an asset class in which performance has historically been highly variable.

Performance depends, in particular, on the quality of the investment management firms, the companies selected, the year of investment, the economic environment, and the strategy implemented.

This dispersion explains why institutional investors devote significant resources to selecting their partners.

Can past performance be used to predict future performance?

No.

Historical performance provides insight into certain long-term trends but is not indicative of future performance. Economic conditions, interest rates, valuations, and market cycles are constantly changing.

Does private equity replace publicly traded stocks in a portfolio?

In practice, large institutional investors generally do not treat these two asset classes as mutually exclusive.

They use them in a complementary manner to take advantage of different sources of value creation and build more diversified portfolios.

Important Information

The information presented in this article is provided solely for informational and educational purposes. It does not constitute investment advice, a personalized recommendation, or an offer to subscribe to or purchase a financial instrument.

The performance comparisons presented are based on historical data from institutional publications. They are provided for illustrative purposes only and are not indicative of future performance.

All investments involve risks, including the risk of capital loss, the risk of illiquidity, and risks related to changes in the markets and the economic environment.