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Private equity

In this note, we provide an overview of private equity. We review the growth of the market, the value creation process, and after cost performance. We also discuss important considerations for prospective investors such as investment costs, potential principal-agent conflicts, and Environmental, Social and Governance (ESG) issues.

14 September 2023


  • Private equity refers to investments in the equity of companies that are not publicly traded. Most investors access private equity by committing capital to funds that invest in private companies or in public companies which they take private.
  • Private equity funds typically have pre-defined investment strategies that target companies at different stages of their lifecycle. The most common strategies are leveraged buyouts (LBOs), venture capital, and growth equity. LBOs involve purchasing majority control of mature companies, partially funded with debt. Venture capital involves purchasing minority stakes in early-stage companies. Growth equity targets later-stage companies in their growth phase, and investments can be either minority or majority stakes.
  • The market for private equity has grown rapidly. Assets under management have increased more than 12 percent annually since 2010. As a share of the public equity market, private equity has grown from 4 percent in 2010 to 9 percent in 2022.
  • Private equity funds generate returns for investors by carefully selecting target companies and exercising active ownership to increase their value, with the aim of selling them for a profit at a later stage. In the past, the main way to create value was by managing a company’s leverage and deleveraging. Recently, improving company governance and operations has been the main driver of value creation.
  • Using performance measures which compare private equity fund cash flows to identically timed investments in public equities, we find buyouts have meaningfully outperformed public equities by 3-4 percentage points annually, on average. In contrast, we find venture capital and growth equity have underperformed by 1-2 percentage points, on average. Our findings on buyouts align with other studies in the literature that rely on different performance measures and datasets, and we continue to find excess return after accounting for market risk and other risk factors. Our results for venture capital contrast with some of the literature but likely depend on the sample period studied. Recent venture capital performance looks more positive.
  • We find performance is highly dispersed and depends on strategy, timing, and manager selection. As a result, the implementation of private equity and selection of private equity funds requires careful consideration from investors.

Download the discussion note (pdf)