Equity investments represent a stake in the ownership of a corporation. Public equity refers to a stake in a company that is publicly owned, while private equity refers to a stake in a company that is privately owned. The difference in corporate ownership translates into considerable differences in the characteristics of public vs. private equity investments.
Public equity is considered one of the three main asset classes, alongside bonds and cash. Private equity, however, is considered an “alternative” asset class, alongside a range of asset types including private debt, real estate, infrastructure and natural resources. The classification as an alternative asset class recognises the characteristics that are relatively unique to private equity, such as its fund structure, stakeholder restrictions, liquidity, and risk factors.
The table below summarises many of the unique characteristics of private equity compared to public equity.
A major difference between public and private equity revolves around the stage of growth in the company.
Companies that are publicly owned represent well-established, somewhat mature businesses that have achieved the size and stature appropriate to public ownership. To be approved for public ownership by regulatory authorities and IPO underwriters, a company is typically expected to have at least the following:
By exclusion, private companies are generally those that have not yet met the above qualifications and are therefore at an earlier stage of their growth. As such, private equity investment targets may be anywhere on the spectrum of growth from companies preparing for an IPO all the way back to those just starting up.
PE firms actively manage their portfolio of companies in their funds and charge higher management fees than public equity mutual funds. A question that is often raised is whether private equity investments underperform public equity investments when comparing net returns after fees.
When allowing for cash flow differences by using a technique called a public market equivalent (PME) and drawing comparisons between public equities and the relevant types of PE funds, the results indicate that private equity has historically outperformed public equity.
In a 2021 analysis, JP Morgan¹ found that the private equity industry is still outperforming public equity, quoting Steve Kaplan from the University of Chicago Booth School of Business. In response to arguments that there was little difference in public vs. private equity performance between 2006-2015, Kaplan noted that when private equity is defined as buyout, growth equity and venture capital funds, private equity’s PME as 1.05 using the S&P 500 or S&P 600, and 1.11 using the Russell 2000 index as the comparison benchmark (where a number greater than 1 symbolises outperformance).
A simplified comparison between public markets and private equity is also complicated by the fact that a public equity investor can invest in an instrument representing a broad public equity market (such as the MSCI World Index), but a private equity investor does not have such an option. Instead, the PE investor commits capital to an individual fund (or fund of funds) that may provide diversification benefits to their overall portfolio.
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¹JP Morgan, June 2021. “Food Fight: An update on private equity performance vs public equity markets.” https://privatebank.jpmorgan.com/content/dam/jpm-wm-aem/global/pb/en/insights/eye-on-the-market/private-equity-food-fight.pdf Equity Performance: What Do We Know?” Journal of Finance 69(5).