Through the looking glass: What the private equity industry doesn't want you to see
- Robin Powell
- Jul 2
- 7 min read
When Chris Cummings, chief executive of the Investment Association, told the Financial Times this week that ordinary investors should be able to put private equity into their ISAs, he painted a picture of profound pension improvements. But peer into the looking glass of academic research, and the private equity industry reveals a very different reality — one where fund managers get rich while investors receive returns barely distinguishable from simple stock market indices.
Like Alice tumbling down the rabbit hole into a world where logic is turned upside down, retail investors risk entering what Oxford finance professor Ludovic Phalippou calls an "upside down world where they don't understand, where the rules of logic and reality are often distorted and the experience is unlikely to be anything like what they expected." Phalippou explores these themes extensively in his book Private Equity Laid Bare, using Lewis Carroll's Alice in Wonderland to explain the industry's complexities.
The Mad Hatter's tea party: Industry claims
Cummings argues that individuals should access private assets through tax-efficient wrappers, claiming this could have a "profound" effect on retirement outcomes. His specific prescription? "For the majority of people, exposure to private markets at somewhere between 5 and 10 per cent of their portfolio would be sufficient to make a profound difference to their pension when they come to retire."
The Investment Association, which represents fund groups and private equity industry players overseeing £9.1 trillion, is pushing for government, industry and regulators to "open up access to private markets." Wealth management giants including RBC Wealth Management, Evelyn Partners and Quilter Cheviot are reportedly preparing to offer these products, while DIY investment platforms like Hargreaves Lansdown and AJ Bell are considering following suit.
It's a compelling narrative. Who wouldn't want access to the supposed superior returns that institutional investors have enjoyed for decades? But as Phalippou warns in his book Private Equity Laid Bare, investors risk being "drawn down the rabbit hole" into a world of opacity and misdirection.
Down the rabbit hole: What the data actually shows
The most comprehensive recent analysis of private equity performance comes from Phalippou's June 2025 research paper Apples and Oranges: Benchmarking Games and the Illusion of Private Equity Outperformance using MSCI Burgiss data covering 2000-2019 vintage funds. The findings are sobering for anyone believing in the private equity industry's outperformance mythology.
The pooled internal rate of return (IRR) for this cohort was 10.8%, with a total value to paid-in (TVPI) ratio of 1.6x. While these figures might sound impressive in isolation, the crucial metric is the public market equivalent (PME) — a measure comparing private equity returns to what investors would have earned in public markets over the same periods.
The PME stands at 0.99, meaning private equity funds performed essentially identically to the S&P 500 over the same period. This isn't a new finding — it's identical to what Phalippou reported in his 2022 research. Even prestigious investors haven't escaped this mediocrity. CalPERS disclosed an IRR of 11.1% for its private equity program with a TVPI of 1.5 — market-level returns. Yale University, once the poster child for endowment success, ceased reporting private equity returns, though their last disclosed performance around 2020 showed just 11.5% over two decades.
The Cheshire Cat's grin: Challenging the "profound
difference" claim
Let's examine Cummings' claim that a 5-10% allocation to private markets would make a "profound difference" to pension outcomes. The mathematics tell a different story.
If private equity delivers the same returns as public markets (PME of 0.99), then a 5-10% allocation cannot meaningfully improve portfolio performance. In fact, given the higher fees and reduced liquidity, it's more likely to harm outcomes.
Consider a £100,000 pension pot split 90% in low-cost global equity funds (charging 0.1% annually) and 10% in private equity (charging 2% management fees plus 20% carry). Even if private equity matched public market gross returns, the net result would be lower overall returns due to the fee differential. Over 20 years, this could cost a pension saver thousands of pounds.
The private equity industry often points to the "illiquidity premium" — supposedly higher returns to compensate for tying up money for years. But as Phalippou's research demonstrates, this premium appears to be largely illusory when proper benchmarking is applied.
Playing croquet with the Queen of Hearts: The benchmarking game
Perhaps the most revealing aspect of Phalippou's research is how private equity industry advocates manipulate benchmarks to create an illusion of outperformance. It's like the Queen of Hearts changing the rules of croquet mid-game.
In the 2000s, when the S&P 500 suffered through a "lost decade" with slightly negative returns, industry advocates promoted it as the appropriate benchmark. Private equity looked good by comparison. But when large-cap US stocks rebounded strongly over the past 15 years, the industry quietly shifted to alternative benchmarks like the Russell 2000 (which has delivered just 9% annually over 15 years) or the MSCI All Country World Index.
This benchmark shopping is anything but neutral. By simultaneously narrowing the definition of private equity — excluding real assets and private debt that often underperform — and switching to weaker public market comparators, the PME can be artificially inflated to 1.17, suggesting significant outperformance where none exists.
Meanwhile, public market benchmarks remain fixed in composition. REITs and utilities are included in indices like the MSCI ACWI, but equivalent private market investments are often excluded from private equity performance calculations. This asymmetry enables what Phalippou calls "selective benchmarking that inflates the relative attractiveness of PE."
The Mad Hatter's economics: A £1 trillion transfer
Even more striking is Phalippou's calculation of wealth transfer within the private equity industry. Using MSCI Burgiss data, approximately $6.5 trillion was invested in private capital funds from 2000-2019, generating $10.4 trillion in total distributions. With a gross profit of around $5 trillion before fees, and standard 20% carry structures, fund managers captured roughly $1 trillion while delivering returns essentially identical to public markets.
This represents "one of the largest single redistributions of value to a small group of financial intermediaries in history," according to Phalippou. The entire economic case for this extraordinary compensation rests on a performance edge that "largely disappears under robust benchmarking."
For UK pension savers, this should raise serious questions. If private equity doesn't consistently outperform public equities after costs, what justifies paying performance fees at this scale?
Through the looking glass: Private equity industry self-interest
The push to bring private equity to retail investors isn't driven primarily by investor welfare — it's about industry economics. The Investment Association's members have watched passive investing erode their profit margins for years. According to Morningstar data, assets in passive funds have grown from £50 billion to over £500 billion in the UK over the past decade, pressuring fees across the industry.
Private equity offers a potential solution. With management fees typically 2% annually plus 20% of profits, compared to 0.1-0.5% for index funds, the profit margins are transformational. Even semi-liquid private asset funds charge significantly more than traditional mutual funds.
Cummings acknowledged that liquidity was "absolutely" a concern for wealth managers, drawing parallels with property funds that have been forced to halt customer withdrawals during market stress. Yet he dismisses these concerns by arguing that "accessing the illiquidity premium can make a huge difference to a retail investor's portfolio."
But if the illiquidity premium is largely illusory, as Phalippou's research suggests, then retail investors are being asked to accept reduced liquidity and higher fees for no compensating benefit.
The Caucus Race: Where everyone wins except investors
In Alice in Wonderland, the Caucus Race is a competition where everyone runs in circles, everyone wins, and "all must have prizes." The private equity industry's ecosystem operates in a similar way. Fund managers get their fees, consultants get their advisory revenues, and placement agents get their commissions. The only participants who might not win are the end investors.
Consider the conflicts of interest. The Investment Association represents fund management companies that would profit from expanded private equity access. Wealth managers earn higher fees on private investments. Even academic research is often funded by industry participants with vested interests.
Meanwhile, retail investors lack the due diligence resources, minimum investment thresholds, and negotiating power that institutional investors possess. They're more likely to access private equity through expensive fund-of-funds structures or retail-oriented products with even higher fees.
Finding the way home: A more honest approach
The evidence suggests retail investors would be better served by ignoring the private equity industry's siren song and focusing on proven strategies: diversified, low-cost index funds across global equity and bond markets.
If policymakers genuinely want to improve pension outcomes, they could focus on increasing contribution rates, extending automatic enrolment, and reducing fees across all investment products. A 1% annual reduction in fees would have a far more "profound" impact on retirement outcomes than any allocation to private equity.
For those determined to access alternative investments, the UK already offers tax-advantaged schemes like Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) that provide genuine diversification benefits and tax reliefs, albeit with appropriate risk warnings.
Conclusion: Honest benchmarking for a wonderland-free future
The private equity industry isn't fraudulent, but the mythology surrounding it warrants serious scrutiny. As Phalippou concludes in his research, "the widely held belief in its persistent outperformance is largely a construct — sustained by selective benchmarking and data filtering."
Before rushing to open ISAs to private equity, regulators should demand transparent, standardised benchmarking practices and full fee disclosure. Comparisons should be adjusted for sector exposures and reflect economic reality rather than narrative convenience.
Until such reforms are embraced, ordinary investors would do well to approach performance claims with skepticism and remember one enduring truth: in investing, as in Wonderland, when something sounds too good to be true, it usually is.
The real profound difference to pension outcomes will come not from chasing the private equity industry's promises down rabbit holes, but from the unglamorous virtues of starting early, saving regularly, and keeping costs low. As Alice eventually learned, sometimes the best adventures are the ones that lead you safely home.
Ludovic Phalippou's book, Private Equity Laid Bare, is available at pelaidbare.com.
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