According to a survey of pension plans, cheap index tracking funds have beaten the returns of private equity investments over the past two decades.
The findings from CEM Benchmarking, a Toronto-based consulting firm, raise more questions about claims of superior private equity performance.
The CEM looked at the net returns (after fees) of 330 pension funds and other large institutional investors in the United States, Canada and the rest of the world between 1996 and 2018.
He found that the average private equity returns delivered to these funds underperformed a mix of US, European and global small-cap equity indices by 67 basis points per year between those years.
CEM chose a combination of small cap indices as a skill test for private equity managers because it offered a robust benchmark that could be easily recreated by investors.
Alex Beath, senior analyst at CEM, said the combination of small-cap indexes presented comparable risk and strongly correlated, but was “hard to beat” for private equity funds.
He added that private equity presented a “double-edged sword” as a pension fund could gain a 20% outperformance over a public market from a portfolio of top performing PEs or a 20% loss. if his bets deteriorated.
“Whether this is a risk that an institutional investor, especially a pension plan, should take is a question that should be asked,” said Mr Beath.
Investors tend to measure the performance of private equity portfolios against a wide variety of benchmarks, including public equity indices such as the S&P 500 or custom benchmarks of PE funds.
Mr Beath said most of these metrics were flawed and did not provide an “apples to apples” comparison of the value added by private equity.
The CEM also looked at the performance of pension plans that managed internal private equity portfolios, a lower-cost model pioneered by large Canadian funds such as CPPIB and Omers. These outperformed the CEM benchmark by 144bp per year between 1996 and 2018.
Pension plans that used PE funds of funds, a high-cost model with additional layers of fees, underperformed on average 227bp per year the CEM benchmark.
Mr Beath said PE’s returns can vary “wildly” from year to year and any additional value gained seemed more difficult to achieve as it struggled to match the successes of the industry’s early years. .
Private equity managers have raised nearly $ 4 billion in new cash from investors over the past decade, according to Preqin.
A survey by the data provider also found that investors expected pension plans and other large investors to further increase PE allocations, given the prospect of moderate returns from listed stocks and bonds. in stock exchange.
It showed that 23 percent of respondents expected a significant increase in their PE allocations and an additional 56 percent expected a slight expansion. Only 4% of investors planned to reduce their PE allocation.