How do private equity firms typically perform compared to public markets

Private equity and public markets are two different markets and the performance of both markets depends on a number of factors. Below I present an overview of how private equity typically compares to public markets. 

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Performance Overview 

 - Risk-Adjusted Returns: One of the main arguments in favor of private equity is risk/return profiles of the investments made are generally superior to public markets. This is mostly because private equity investments are relatively unknown from daily market fluctuation since they are not priced daily. They are rather conducted at the moment of exit or during some defined periods, and, therefore, they exclude such emotional factors as, for example, greed and fear, resulting in more stable value within a certain period of time [2][4]. 

 - Historical Returns: Several researches show that experience a return on investment equivalent to or marginally higher than public equity markets net of fees. For instance, a study proved that a large Public Pension Plan in U S earned approximately $1. From 2006 till 2015, the good financials were even better, returning 50 cents for each dollar invested in private equity funds while delivering the same annualized returns as the S&P 500 index[4]. However, more recent appraisal indicates that some of them might had better returns just following Standard and Poor’s 500 index than investing in the U. S. buyout funds[4]. 

 - Investment Horizon: Private equity investments, as it was mentioned before, usually take between 7 and 10 years to generate returns, since they operate with the companies in different phases of development, waiting to exit through such methods as IPOs or sales. This is different from public markets where there is always the liquidity factor which enhances the ability to conduct rapid transactions in the underlying assets. 

Factors Influencing Performance 

 - Market Conditions: Thus, the rate of returns in private equity has been found to be sensitive to changes in the economic environment. For instance, private equity is normally strong during the economic uptrend, with low interest rates, and high company valuations because of an improvement in financing conditions. On the other hand, during the downturns, the illiquidity of private equity causes several problems in realizing value[3][4]. 

 - Fees and Expenses: Private equity funds typically take large amounts of management fees that average at around $20000 per year and performance fees normally at 20% of profit. These fees can reduce net returns, therefore, investors have to take these fees into account especially when comparing overall performance with that of public equities[4]. 

 - Access to Top Managers: The returns of private equity investments are therefore highly sensitive to the accessibility of high-quality fund managers. Some PE funds do not necessarily earn higher returns; therefore, the skill in identifying better-performing funds, enhances improved performance compared to the public markets[2][4]. 

Conclusion 

To conclude, private equity, due to its differentiation from other asset classes, can also provide strong risk-adjusted returns together with diversification benefits but the performances compared with the public markets can be influenced by the market condition of the states, investment horizon, fee structure, and manager selection. These factors should be properly taken into consideration by investors when making investment decisions with regard to mixes between private equities and public equities. 

Citations: Check comments on Reddit

[1] https://www.reddit.com/r/venturecapital/comments/174rpbg/public_market_vs_private_market_investing/

[2] https://www.reddit.com/r/investing/comments/1arxsux/tony_robins_private_markets/

[3] https://www.reddit.com/r/Wealthsimple/comments/1bx2epu/private_equity_returns_this_year/

[4] https://www.reddit.com/r/finance/comments/h8rgzz/private_equity_barons_grow_rich_on_230bn_of/

[5] https://www.reddit.com/r/CFP/comments/1839k74/financial_advisors_what_strategies_are_you_using/

[6] https://www.reddit.com/r/AusFinance/comments/18mo38h/returns_in_excess_of_1520/

[7] https://www.reddit.com/r/Economics/comments/1e4mule/private_equity_has_become_hazardous_terrain_for/