Private Equity: The Emperor has No Clothes

Replicating Private Equity with Public Equities

December 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Private equity returns can be replicated with small cap equities
  • Small, cheap and levered stocks would have achieved higher returns since 1988
  • Valuation and debt multiples are at all-time-highs, lowering expected returns


The private equity industry had an abysmal outlook in 2008 and many portfolio companies were at the brink of collapse. Carlyle Capital, a listed affiliate of the US buyout giant The Carlyle Group, defaulted on its debt.

Fast-forward to 2018 and such global financial crisis–related difficulties seem almost forgotten and private equity is flourishing. Indeed, alternative investment firms have $1.8 trillion in “dry powder” waiting in reserve and more than half of that is held by private equity funds.

The fondness for private equity among institutional investors is easy to explain: It comes down to high returns, low volatility, and a lack of correlation to traditional asset classes. Of course, such attributes also evoke some skepticism: Don’t they sound just too good to be true?

To explore that question, we set out to replicate private equity returns with public stocks.


Private equity returns in the United States have outperformed various equity and bond benchmarks over the long term, according to data from Cambridge Associates. Private equity returns are compiled from 1,481 US private equity funds and are available net of fees on a quarterly basis. Using this data, we construct a U.S. Private Equity Index that has outperformed the S&P 500 by a significant margin since 2000 (try Finominal’s Alpha Analyzer for alpha and contribution analysis).