Is private equity worth it? The numbers behind the hype

Private equity has outperformed public markets over the past 30 years — that much is true. But new research shows the margin is far smaller than the industry claims, has been shrinking for two decades, and is partly explained by risks you're already taking elsewhere in your portfolio.

You know the velvet rope. The one outside the club with the VIP section you're not quite dressed for. The members-only lounge at the airport. The invite-only sale that makes you feel, briefly, like someone who matters.

Private equity has always been sold the same way. For decades, it was genuinely exclusive: minimum investments of £10 million, access only through institutional channels, a world reserved for pension funds and endowments. Ordinary investors couldn't get in even if they wanted to.

Now the rope is coming down. Platforms offer PE access from £10,000. Pension schemes are adding "alternatives" to their default funds. Wealth managers pitch "institutional-quality" investments to anyone with six figures to deploy. Assets in the sector have more than doubled to $4.7 trillion since 2018, and the industry is hungry for more.

So is private equity worth it? That's the question every adviser seems to answer with an enthusiastic yes, usually while glossing over the fees, the lock-ups, and the awkward fact that half of what they're calling "outperformance" disappears under scrutiny.

"Half of what they're calling 'outperformance' disappears under scrutiny."

Here's what the sales pitch rarely mentions: the people telling you PE delivers superior returns have a financial interest in you believing it. The latest research, including a major 2025 study from MSCI, finds that once you adjust for leverage, size, and sector exposure, buyout funds' apparent edge shrinks by nearly a quarter. For venture capital, it's closer to 60%.

The evidence exists to answer the question properly. But first, you need to understand what you're being sold.

The pitch you've probably heard

The marketing follows a familiar script. Private equity, you'll be told, delivers returns that public markets can't match. Double-digit annualised gains. Access to companies before they go public. A smoother ride because your holdings aren't repriced every time markets wobble.

The pitch includes three key claims. First, the illiquidity premium: by locking up your money for seven to ten years, you earn extra returns that impatient investors miss. Second, lower volatility: PE valuations don't swing wildly like stock prices, so your portfolio looks steadier on paper. Third, alignment of interests: fund managers invest alongside you and only get paid when they deliver.

After 2022, when both stocks and bonds fell together and the traditional 60/40 portfolio offered nowhere to hide, this story found a receptive audience. Investors who'd watched their ISAs suffer double-digit losses were understandably drawn to an asset class that seemed to float above the chaos.

The narrative is psychologically satisfying. It suggests you can buy your way out of market risk if you're sophisticated enough to access the right investments. It frames restricted access as evidence of quality.

But satisfying and accurate aren't the same thing. The pitch leaves out plenty.

What 30 years of evidence shows

Private equity has outperformed. The question is by how much, and whether that margin justifies the fees, the lock-ups, and the complexity.

The most comprehensive recent analysis comes from MSCI, published in the Journal of Private Markets Investing in late 2025. Examining data from 1994 onwards, researchers found buyout funds delivered annualised excess returns of 3.8% over public markets.

Venture capital managed 2.0%. These are positive numbers. They're also far smaller than the double-digit premiums that sales materials imply.

Figure 1: How much extra did private equity really deliver? Annual excess returns (“direct alphas”) for US buyout and VC funds relative to a like-for-like small-cap equity index, after adjusting for sector, size and leverage. Source: Lester, O’Shea & Warren (2025), MSCI

Consider what you surrender for that 3.8%. A decade of illiquidity. Limited transparency. All-in fees that can reach 6% per year once you account for management charges, carried interest, transaction costs, and fund expenses.

"Consider what you surrender for that 3.8%. A decade of illiquidity. Limited transparency. All-in fees that can reach 6% per year."

The trajectory matters as much as the headline. Ludovic Phalippou's 2020 study in the Journal of Investing found that PE returns had matched public equity indices since at least 2006. The golden era, when buyout funds delivered outperformance worth the premium, was the 1980s and 1990s. Back then, the industry was smaller, competition for deals was thinner, and operational improvements at portfolio companies could move the needle. That world no longer exists.

Timing your entry amounts to a lottery. Vintage years vary enormously. Investors who committed capital in 2006 or 2007 experienced a very different decade than those who invested in 2009 or 2010. Unlike public markets, where you can dollar-cost average through volatility, PE forces concentrated bets on specific windows. Pick wrong, and you're locked into underperformance for a decade.

The honest summary: PE has delivered modest outperformance over 30 years, but that edge has been shrinking since the mid-2000s, and your experience depends on when you invested and which funds you accessed.

Where the "outperformance" comes from

Much of what private equity sells as manager skill is factor exposure dressed up in expensive packaging.

The MSCI study didn't just measure returns. It decomposed them. The researchers asked a simple question: how much of PE's edge comes from genuine alpha, and how much from tilts toward risks you could access elsewhere? The answers should give anyone considering PE pause.

Start with leverage. Buyout funds run portfolios that carry roughly 25% more debt than comparable public companies. Leverage amplifies returns in good times. It's also a well-understood risk factor, not a proprietary insight. You could achieve similar exposure by buying shares on margin or tilting toward more leveraged public companies. You wouldn't pay 2-and-20 for the privilege.

Then there's size. PE funds, particularly in the lower mid-market, invest in smaller companies. Small-cap stocks have historically delivered higher returns than large-caps over long periods. This isn't secret knowledge. Small-cap index funds exist. They charge basis points, not percentage points.

Sector concentration explains even more for venture capital. VC portfolios overweight information technology by 17 percentage points compared to public markets. When tech booms, VC looks brilliant. When it doesn't, the picture changes. MSCI found that adjusting for sector exposure alone eliminated 58% of VC's apparent outperformance. For buyouts, factor adjustments wiped out 23%.

Figure 2: Not magic – just different bets. Sector tilts of US buyout and venture capital portfolios relative to the broad US equity market. Private equity has consistently been overweight sectors such as technology and industrials – risks investors could access more cheaply in public markets. Source: Lester, O’Shea & Warren (2025), MSCI

Erik Stafford at Harvard Business School took this further in a 2022 working paper. He constructed a theoretical portfolio using small, cheap public companies, modest leverage, and hold-to-maturity accounting. The result matched PE's pre-fee returns. His conclusion: what investors pay premium fees for, they could largely replicate themselves.

The practical reality is messier. You can't buy Stafford's portfolio in a single fund. Applying leverage yourself introduces margin calls and tax complications. But the principle stands: much of PE's returns comes from factors that aren't unique to private markets. The industry charges for exclusivity. The underlying exposures are anything but.

"The industry charges for exclusivity. The underlying exposures are anything but."

Why the VIP room is suddenly open to everyone

The timing tells you everything. Private equity is opening its doors to retail investors precisely as institutional outperformance has faded.

Think about it from the industry's perspective. The big pension funds and endowments have had access for decades. They've seen the data. Many have grown sceptical. A 2016 study by researchers from Canada Pension Plan Investment Board and Abu Dhabi Investment Authority found "no significant outperformance" after proper risk adjustments. These are sophisticated allocators with armies of analysts. If PE still delivered easy alpha, they'd be increasing their commitments, not asking hard questions.

So where does new capital come from? Retail investors. Wealthy individuals control roughly half of global investable assets but hold only 16% of alternative investments. That gap represents trillions in potential fees.

The infrastructure is being built as we speak. MSCI, the index giant, paid $697 million to acquire Burgiss in August 2023. Burgiss provides the data that underpins most serious PE performance research. Shortly after, MSCI announced plans to launch combined public-private equity indices, making it easier for wealth managers to benchmark and sell PE allocations. The same firm publishing research on PE returns now has a commercial interest in channelling assets toward private markets.

Adviser incentives align neatly with this push. Recommending a global tracker fund earns a wealth manager very little. Placing a client into a PE feeder fund, with its layered fee structure, is considerably more lucrative. The complexity itself becomes a selling point: you need professional guidance to navigate these waters.

None of this means PE is a scam. But it does mean you should ask why the velvet rope is coming down now, rather than ten or 20 years ago when returns justified the premium. The answer isn't that the industry developed a conscience about access. It's that they need your money.

"The answer isn't that the industry developed a conscience about access. It's that they need your money."

How to get similar exposure without the premium price tag

You can capture much of what PE offers through public markets, though not all of it, and not without effort.

Start with the factors that explain the bulk of returns. Small-cap value funds give you exposure to the same type of companies buyout funds target: smaller businesses trading at lower valuations. A UK small-cap value ETF charges perhaps 0.3% annually. Add a modest tilt toward sectors like industrials or healthcare, and you've replicated a meaningful portion of PE's underlying bets.

Leverage is trickier. You could use margin, but that introduces risks most retail investors shouldn't take. A simpler approach: accept that you're giving up some of the leverage-driven returns in exchange for avoiding the complexity. The cost savings alone may compensate.

If you're still drawn to PE despite everything, ask these questions before committing:

What are the all-in fees? Not the headline management fee. The total cost including carry, transaction charges, fund expenses, and any platform fees. If your adviser can't provide a single number, that's informative.

How does performance compare to a matched benchmark? Not the S&P 500. A levered small-cap value index, adjusted for sector exposure. If they're comparing to broad public markets, they're flattering their numbers.

What's the manager's specific edge? Operational expertise? Proprietary deal flow? Sector specialism? "Access to private markets" isn't an edge. It's a description.

Which vintage years are you investing in? Committing fresh capital to a 2024 fund is very different from buying secondaries from 2019.

PE might make sense in narrow circumstances: if you have access to top-quartile managers with verified track records, if co-investment opportunities reduce the fee drag, or if the forced illiquidity prevents you from making emotional decisions you'd otherwise regret. Some investors value that behavioural constraint. Don't pay 6% a year for what is a lock on your own impulses.

Red flags to watch for: any pitch that emphasises "smooth returns," comparisons to headline indices rather than risk-adjusted benchmarks, gross rather than net performance figures, or urgency about limited allocation windows. These are selling techniques, not investment analysis.

Is private equity worth it? Here's the honest answer

So is private equity worth it? For most investors, probably not — at least not at the price being charged.

The VIP room looked exclusive because it was kept that way, not because the drinks were better. Now that you know what's being served — modest outperformance that's been shrinking for two decades, factor exposures you can access elsewhere, and a fee structure that captures much of whatever edge remains — the velvet rope loses its power.

This doesn't mean you've been foolish to wonder about PE. The marketing is sophisticated, the psychology of exclusivity is real, and the opacity makes independent evaluation difficult. Asking the question is sensible. What matters is having the evidence to answer it.

You now do. You can build a portfolio that captures similar risk factors at a fraction of the cost. You can interrogate any PE pitch with the right questions. And if you still choose to allocate to private markets, you can do so with realistic expectations rather than manufactured ones.

The best investment insight isn't getting access to something exclusive. It's recognising when exclusivity itself is the product being sold.

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