Private equity buyouts have “meaningfully outperformed” public equities by an average of 300 to 400 basis points, according to research from Norges Bank Investment Management, which manages Norway’s $1.4 trillion sovereign wealth fund, the Government Pension Fund Global.
“We continue to find excess return for buyout after accounting for market risk and other risk factors,” stated an NBIM discussion note that analyzed the growth and performance of the private equity market. However, it added that 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 require careful consideration from investors.”
According to NBIM, global private equity assets under management have increased more than 12% annually since 2010 to reach $7 trillion in 2022. As a share of the public equity market, private equity has more than doubled in size to 9% in 2022 from 4% in 2010. It also noted that the growth of private equity has coincided with a slowdown in the growth of the number of public companies.
“While the private equity market has experienced significant growth, the growth of the public equity market has stalled over the same period,” the NBIM note stated. “The listed equity market has experienced modest growth in the past two decades, and the number of globally listed companies has levelled off. There has also been a decrease in the number of companies listing.”
The number of IPOs in the U.S. has decreased to an annual average of around 120 since 2000, according to NBIM, from approximately 300 per year between 1980 and 2000. “The contraction in the number of listings is particularly notable as valuations have been high over this period, and this is when companies typically go public,” the NBIM note stated.
To evaluate the market for private equity, NBIM used fund- and deal-level data from investment data firm Preqin, which includes historical fund-level data on more than 50,000 funds collected from public sources and Freedom of Information Act requests. The market for private equity now represents more than 60% of the total market for alternative assets, including hedge funds, infrastructure and private debt, according to NBIM.
While NBIM found that private equity outperformed public equities, it also found that venture capital and growth equity, in contrast, have underperformed by an average of 100 to 200 basis points.
“However, the evidence on venture capital is mixed and varies based on the sample period and dataset employed,” the note stated.
NBIM also cautioned that because private markets disclose less than public markets in general, it is important for investors to determine whether disclosures are sufficient to manage their environmental, social and governance goals and reporting requirements.
“Investors should also examine the impact of private equity ownership on portfolio company ESG outcomes and the exposure to green assets that is achievable,” the note suggested. However, it added that “ESG disclosures from private equity firms appear to have increased considerably over time.”
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Tags: buyouts, Government Pension Fund Global, NBIM, Norges Bank Investment Management, Norway, Private Equity, Public Equity, Sovereign Wealth Fund, Venture Capital