What is left of the private markets premium

Private markets have outperformed in several areas over three decades. The conditions that produced that record have changed, and selection now matters more than access.

Measuring is the hard part

Comparing private funds with listed markets is difficult. Valuations are reported quarterly and tend to be smoothed, cash moves in and out at irregular times, and the right benchmark is often unclear. Researchers increasingly use a measure called direct alpha, which compares each fund’s cash flows with what the same money would have earned in a matching public index.

What three decades of data show

Research led by Gregory Brown of the University of North Carolina, covering 7,816 private funds from 1988 to 2019, finds clear differences between strategies.

Source: Brown et al., study of 7,816 private funds, 1988 to 2019. Figures are annualised direct alpha against public market benchmarks, as reported by the authors. Historical results do not predict future returns.

Why the next decade may differ

Much of the buyout record was earned in an era of falling interest rates and cheap leverage. Entry valuations have since risen, debt costs more, and returning capital to investors has become slower. Private credit benefited when banks retreated from lending; as competition returns, margins tend to compress. Infrastructure retains structural support from energy transition, digital networks and ageing assets that need replacing, though valuations there have also risen.

In our assessment, the broad premium for simply being invested in private markets is narrower than the historical averages suggest. The difference between good and poor managers, however, remains wide, wider than in most listed asset classes.

Why companies stay private

There is also a structural shift. Large pools of private capital, an active secondary market for private shares, and regular tender offers for employees mean that companies can raise substantial sums and provide liquidity without listing. Many stay private far longer than they once did, so a larger part of their growth now happens before they ever reach a stock exchange. That is an argument for access, but only on the right terms.

How we approach it

For a family, private investments raise four questions before any return is discussed: who the manager is and how consistent its record has been, what the terms and fees are, how long the capital will be committed, and how much of the overall wealth can sensibly be locked away. We review opportunities with families on that basis, and coordinate with specialist partners where a transaction requires it.

Sources: Brown et al. (private fund performance study, 1988 to 2019). This article is provided for information purposes only. It does not constitute investment advice, an offer, or a recommendation to buy or sell any financial instrument or to adopt any strategy. The views expressed are those of the author and of GYRA SA at the date of publication and may change without notice. Past performance is not indicative of future results. Data sourced from third parties is believed to be reliable but has not been independently verified by GYRA SA.