Private Equity Without the Lag

Creating an index of listed private equity funds with daily returns

August 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Listed private equity funds can be used to create a PE index with daily returns
  • Highly correlated to private market indices
  • PE funds have not outperformed the S&P 500 over the last decade

INTRODUCTION

Since publishing our initial research articles on private equity in 2018 and 2020 (read Private Equity: The Emperor has No Clothes and Private Equity Is Still Equity, Nothing Special Here), one question has come up repeatedly: Can public equities be used to replicate private equity returns?

While the idea is appealing, the private equity industry has evolved significantly since its early days in the 1980s. Back then, when capital was scarce, pioneers like KKR focused on acquiring small, inexpensive, and stable companies using leverage. Today, with over $4 trillion in assets under management, the industry’s investment style has diversified substantially, encompassing a wide range of company types and deal structures. As a result, replicating private equity returns using stocks has become increasingly difficult.

Recently, Dan Rasmussen of Verdad Advisors highlighted a relatively overlooked segment of the market: a group of listed private equity funds traded on the London Stock Exchange. These funds invest directly in private equity deals or in PE funds and, because they trade publicly, offer daily pricing – making them suitable building blocks for a private equity funds index with daily returns.

In this research article, we explore the construction of such an index using listed private equity vehicles.

LISTED PRIVATE EQUITY FUNDS

The listed private equity funds universe is small with only 28 securities, but includes some well-known names like Apax, HgCapital, and Partners Group. Only 20 remain actively traded on European exchanges, while 8 have been delisted. The fact that many have disappeared highlights an i