Industry News
March 6, 2020

Private Equity Is Safer Than Stock In Downturns. But Finding The Best PE Fund Is Hard

Nicolas Cole

The outperformance of private equity compared to public equities is widely publicized, with data from a range of providers showing that the former has outperformed the latter, often significantly.

JPMorgan Asset Management, for one, estimates that in the 15 years through the end of 2017 private equity generated a 14.4 percent net annual return versus 8.8 percent for the MSCI World equity index.

Less appreciated than private equity’s outperformance is its lack of downside risk. Research from Hamilton Lane and JPMorgan Asset Management shows that two-fifths of publicly-listed equities experience “catastrophic loss,” defined as a 70 percent or greater drop from peak value, with minimal recovery. Yet less than 3 out of 100 private equity funds suffer similar loss. In this regard, stocks are a stunning 13 times riskier than private equity funds.

In a recent study from Harvard, Stanford and Northwestern it was found that on average
PE-backed companies recovered faster from the GFC, and ultimately captured more market share in their respective sectors, than their non – PE backed rivals.

They also determined that despite significant amounts of leverage, PE-backed firms were no more likely to go bankrupt than their peers. The long-term horizon of private equity funds, the traditionally activist approach of PE owners, and their access to cash through uncommitted capital and credit networks – including banks and private funds – permitted PE-backed companies to issue more debt and equity than peers, making them more resilient and, finally, faster growing.

Source: Forbes

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Nicolas Cole

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