The Truth Revealed: The perception that private equity is inherently riskier than public equities doesn’t always match up with reality

April 03, 2023 | 3 Min Read

Once considered speculative, private markets continue to evolve, especially as the structural hurdles for ultra-high-net-worth (UHNW) investors have come down. Still, no matter the level of expertise or the market environment, investors and advisors who understand this segment of the market are well positioned to make informed and comprehensive decisions about their portfolios.

This Truths Revealed series explores private market investing with three objectives in mind:

  • To dispel some of the incorrect notions about private markets;
  • To help investors and advisors better understand private markets’ potential to outperform public markets;
  • To assist investors and advisors as they consider how private markets investing may align with their investment objectives

What you should know

  • If you invested $1.00 in the stock market in 2018, it would be worth $1.23 in January 2023, while $1.00 invested in private equity over the same time frame would be worth $2.24.1
  • When considering private market opportunities, investors can tailor their strategies to include small cap growth, large cap value and everything in between.
  • In 2022, the U.S. Securities and Exchange Commission recommended expanding high-net-worth (HNW) investor access to private investments, citing how private markets often outperform public markets while adding considerable diversification to investors’ portfolios.2

Catastrophic Losses – Private Markets vs. Public Equities

There’s a notion among investors that private equity is too risky relative to public equities. As it turns out, this generalization fails to account for a number of important factors, such as the wide array of target companies to choose from in private equity markets, the minimal likelihood of catastrophic losses and the power of a well-diversified portfolio.

The key takeaway for investors who are considering the risk/return tradeoff for private equity is that it an represent a target-rich environment, the market potential of which is dramatically larger compared to publicly traded companies.

Private Equity Has an Impressive Track Record Outperforming Public Equity

Additionally, not all private market opportunities are the same. Investors can choose from small cap growth to large cap value, and everything in between. This is because each portfolio is designed with a different objective in mind, which translates to a wide array of investment opportunities – each with different risk/return profiles.

Perhaps you’re more concerned about a catastrophic loss, whereby companies experience a 70% decline in value from their peak coupled with minimal recovery. Within a buyout fund, these types of losses can be infrequent. Why? Buyout managers don’t build overly concentrated portfolios because they understand the power of diversification to potentially mitigate risk exposure.

As noted in our prior piece, between 2000 and 2022, the private market landscape ballooned from $600 billion in assets under management (AUM) to $9.7 trillion in AUM.3 Also consider that $1.00 invested in public equities in 2018 would be worth $1.23 in 2022, while that same dollar invested in private equity would have grown to $2.24.

The Growth of $1 Invested in Public Equities vs. Private Equities
MSCI World used as proxy for public equities

We should also highlight how private markets have a long track record of performing during up and down markets. This includes outperforming the public markets almost every year between 2002 and 2022. Further, Hamilton Lane’s proprietary market data, which spans 27 years, finds that the average private equity buyouts are returning 6x more and growth equity 11x more.

Further, the Securities and Exchange Commission’s Asset Management Advisory Committee in 2022 recommended expanding HNW investor access to private investments. The committee’s report showed that private equity, private debt and private real estate investments often outperformed public investments and added diversification to a portfolio.4 This should give HNW investors a greater degree of confidence, especially since private market investing is one of the best ways to play in the large, growing universe of smaller companies worldwide.

Looking ahead, we anticipate that private markets will continue to attract a much larger share of HNW investors’ wallets than they have traditionally represented, so much so that a traditional 60/40 equity/fixed income portfolio may soon be a thing of the past. What’s more, we are convinced that by 2042, investors may have portfolios with 50% allocated to private equity, while still managing their levels of risk, return and duration.

Continue reading our Truths Revealed series for more insight into the private markets for HNW and UHNW investors.

1 Hamilton Lane Data via Cobalt, Bloomberg (August 2022)
2 SEC Proposes to Enhance Private Fund Investor Protection, U.S. Securities and Exchange Commission, 2022

3Hamilton Lane Data (August 2022)

4 SEC Proposes to Enhance Private Fund Investor Protection, U.S. Securities and Exchange Commission, 2022
Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company.

Private Equity – A broad term used to describe any fund that offers equity capital to private companies.

Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures

Credit – This strategy focuses on providing debt capital

Index Definitions
MSCI Word - The MSCI World Index tracks large and mid-cap equity performance in developed market countries.

Other Definitions
PME (Public Market Equivalent) – Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based off of these adjusted cash flows.

This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.

The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.

All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed.

This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein.

Certain of the performance results included herein do not reflect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client’s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane’s fees are described in Part 2 of our Form ADV, a copy of which is available upon request.

The following hypothetical example illustrates the effect of fees on earned returns for both separate accounts and fund-of-funds investment vehicles. The example is solely for illustration purposes and is not intended as a guarantee or prediction of the actual returns that would be earned by similar investment vehicles having comparable features. The example is as follows: The hypothetical separate account or fund-of-funds consisted of $100 million in commitments with a fee structure of 1.0% on committed capital during the first four years of the term of the investment and then declining by 10% per year thereafter for the 12-year life of the account. The commitments were made during the first three years in relatively equal increments and the assumption of returns was based on cash flow assumptions derived from a historical database of actual private equity cash flows. Hamilton Lane modeled the impact of fees on four different return streams over a 12-year time period. In these examples, the effect of the fees reduced returns by approximately 2%. This does not include performance fees, since the performance of the account would determine the effect such fees would have on returns. Expenses also vary based on the particular investment vehicle and, therefore, were not included in this hypothetical example. Both performance fees and expenses would further decrease the return.

Hamilton Lane (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorised and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.

Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the United Kingdom this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.

Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws. The PDS and target market determination can be obtained by calling 02 9293 7950 or visiting our website

Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.

The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners.

As of May 31, 2023

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