Private Equity: PE Outperforms and Closes the Valuation Gap
Private equity performance is primed to improve relative to public equities as multiples between public and private markets converge.
Our recent research has corroborated previous findings that private equity funds are more correlated to public equity markets than conventional wisdom would lead many investors to believe. To assess the correlation, we created a "PE index" by calculating the aggregate percentage change in net asset value for each group of funds in a sample, considering contributions and distributions during the quarter. The PE index had a correlation of 0.75 with the S&P 500 since 2001 and 0.84 since 2008. In light of this and the tumultuous year for public equities in 2018, our initial inclination was that private market strategies would follow a similar downward trajectory. Our hypothesis changed, however, when examining the data more closely. We think returns will remain solidly in positive territory, though we still believe that absolute returns for PE funds will fall throughout reporting periods in 2018. Furthermore, we anticipate performance relative to public equities to increase.