Does Private Equity Really Beat the Stock Market?
Private equity funds use lots of debt, or leverage, on top of their equity when they buy a company. This boosts the returns to their equity investment.
If “Company A” is bought for $100 million, the fund might use $30 million of the cash equity in its fund and borrow $70 million. Or to put it another way, the $1 trillion of private equity cash that the industry has on hand could buy $3.3 trillion worth of companies on that ratio.
“Private equity is levered, meaning it is riskier. It is illiquid, meaning it is riskier. The returns darn well better be greater than the S&P. If they’re not, this is one of the greatest scams going. It may still be…”
“A more interesting comparison would be to show S&P 500 returns with leverage corresponding to what is in the private-equity funds. “The S&P 500 numbers, so adjusted, would be much higher I think.”