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Private equity gives poor results for high fees

Stock chart, grey translucent calculator and blue pen.
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Having reported on the results of private equity investments many times, it came as no surprise that the results of a new academic study prepared for the Financial Times found disappointing results.

Despite the fact investors in private equity forgo the benefits of liquidity, transparency, broad diversification, daily pricing and the ability to harvest losses, returns have had a hard time keeping up with the returns on publicly available stocks (specifically, the returns on small-cap value stocks). And thus, the returns haven't been commensurate with the risks involved.

From 2001 through 2010, U.S. pension plans, having paid out 4 percent in fees, earned 4.5 percent on their private equity investments. The Fama-French index of small-cap value stocks (excluding utilities) returned 13.8 percent for the same period. The Russell 2000 Value Index returned 8.4 percent.

Of course, you're more likely to see the private industry compare their returns to those of the S&P 500 Index, which returned just 1.4 percent. However, that's comparing apples to oranges. The stocks in the S&P 500 not only have all the benefits mentioned above related to public stocks, but they're clearly safer investments than non-public, typically very small companies. The lesson here is that you shouldn't be fooled by such comparisons.

Those interested in learning more about the research on private equity can read the chapter on the subject in The Only Guide to Alternative Investments You'll Ever Need or The Quest for Alpha.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.