Private market funds have underperformed large-cap US stocks over both short and long-term periods for the first time in nearly 25 years. This trend is driven by a slowdown in private equity dealmaking, which has hurt returns in the sector.
According to State Street’s private equity index, which tracks returns from private equity, private debt, and venture capital funds, the return last year was 7.08%. In contrast, the S&P 500 index, representing Wall Street’s top stocks, delivered a 25.02% total return.
The S&P 500 outperformed private market funds over the last three months of 2024, as well as over one, three, five, and ten-year periods. This marks the first year since 2000 that private market funds have lagged behind the S&P 500 across all these timeframes. The performance gap in 2024 was also one of the largest on record.
Investors have poured trillions into private markets, expecting higher and steadier returns and access to more companies than public equity markets. However, the benefits from leverage and rising asset prices have faded over the past five years, impacting private equity managers negatively, said Arjun Raghavan, CEO of Partners Capital.
The data, based on actual cash flows rather than voluntary reporting, reflects challenges in the global buyout industry, which has struggled to buy and sell companies.
Rapid interest rate hikes in 2022 increased borrowing costs, creating a gap between what buyers were willing to pay and what sellers expected. This mismatch led to fewer exits and made it difficult for buyout funds to return cash to investors.
Dealmakers had hoped for a boost in activity with the election of US President Donald Trump, but his trade policies have so far disappointed those expectations.
The State Street index, covering over 4,100 funds with $5.7 trillion in committed capital, last outperformed the S&P 500 in 2022, when it posted a smaller loss than the public market. Among strategies in the index, private debt had the best return last year at 9.11%, followed by venture capital at 7.05%, and buyout funds at 6.81%.
The private equity index also underperformed the Russell 2000 index of smaller public companies in 2024, though it outperformed that index over longer periods of three, five, and ten years.
Raghavan noted that private equity is not a uniform asset class, and skilled managers can still outperform public equities. He also pointed out that recent S&P 500 gains were driven by a few large stocks, which may not sustain their performance long term.
Ken Barry, a mergers and acquisitions partner at White & Case, said top private equity firms remain reliable for outperforming public benchmarks and offer lower correlation to public market volatility.
State Street data shows that private funds focused on financial and energy sectors performed better than generalist funds, with returns of 15.08% and 10.89% respectively in 2024. Funds targeting information technology also exceeded the private markets average with an 8.12% return.
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