More risk, same return
Would you like to own an investment that has higher risk than listed equities but the same or even lower returns? Apparently, investors – especially institutional investors – love these kinds of investments because they have been pouring billions into them in the last couple of decades.
According to Preqin’s Institutional Allocation Study 2024, the share of assets allocated to private equity has increased from 4.3% in 2019 to 6.9% in 2024. Aviva’s Private Markets Study 2026, meanwhile, states that among their respondents, the average allocation to private equity within private assets is 21.5%, about the same as real estate at 22% and way ahead of any other private asset.
When asked why they like to invest in private equity, institutional investors typically mention that private equity has higher volatility than other private assets, but also higher returns. So, the extra risk is worth it. Or is it?
Of course not, as Noel Amenc and his colleagues at EDHEC show for the first time. They collected comprehensive quarterly private equity data from 2013 to 2024 and calculated the risk of investing in this asset class for different time horizons. The first chart shows what investors already know: No matter how long you invest in private equity, it is always more volatile than investing in listed equities and long-dated Treasuries. At least the volatility of private equity investments declines as the investment horizon increases, indicating that there is mean reversion in returns, i.e. periods of poor returns are followed by periods of good returns and vice versa.
The term structure of risk in private equity
Source: Amenc et al. (2026)
And now for the bad news. The study also simulates the excess return created from investing in private equity, listed equity and Treasury bonds. The good news is that, on average, private equity almost doubles excess wealth over a risk-free investment after five years (1.90x). The bad news, as you can see in the charts below, is that it has about the same returns as listed equity.
Cumulative excess wealth
Source: Amenc et al. (2026)
So, private equity really isn’t such a great deal compared to listed equity. But most experienced investors know that already. And they know why institutional investors are still willing to pile into private equity and private assets in general: Lower volatility on paper, which seemingly creates lower correlation to other asset classes and the illusion of a liquidity premium.
When i worked at a major pension fund in the 1980's, a partner from a long established Private Equity house came in to present to us.
He gave performance figures and obviously they were very favourable.
I asked him what would be the return if he bought an S&P future with gearing that matched that of his Fund.
He didn't know but promised to get back to me. Which being a gentleman (as existed in investment in those long gone times), he did.
The answer was that the returns were identical.
So even one of the most experienced, long established equity houses, at a time of far less competition, didn't add any value other than their ability to access debt.
Since then, about 1988, i have ignored the siren calls of PE.
When I talk with Stupid German Money, what I often hear is that stocks are too risky -- just look at all that volatility! -- so real estate is the place to be. I counter that real estate would demonstrate similar volatility if it were liquid, which it unfortunately ain't, so where's the actual advantage?
Well, there's the artificial or perceived scarcity of RE; in light of the three >$1 trillion IPOs planned for this year, nobody's describing the stock market in those terms.
My layman's view of Private Equity would be that it shares RE's advantages of perceived scarcity and hidden volatility. (With stress on "perceived" and "hidden").