Private vs. Public Markets, Private Wealth

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

April 03, 2023

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 


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 Truth 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

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 can 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 

MSCI World used for the PME 

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 pastWhat’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. 

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

Strategy Definitions

All Private Markets – Hamilton Lane’s definition of “All Private Markets” includes all private commingled funds excluding fund-of-funds, and secondary fund-of-funds.

Co/Direct Investment Funds – Any PM fund that primarily invests in deals alongside another financial sponsor that is leading the deal.

Continuation Vehicles – A vehicle in which secondary buyers acquire one or more assets from an existing fund.

Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company.

Credit – This strategy focuses on providing debt capital.

Distressed Debt – Includes any PM fund that primarily invests in the debt of distressed companies.

EU Buyout – Any buyout fund primarily investing in the European Union.

Fund-of-Funds (FoF) – A fund that manages a portfolio of investments in other private equity funds.

Growth Equity – Any PM fund that focuses on providing growth capital through an equity investment.

Infrastructure – An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.

Late Stage VC – A venture capital strategy that provides funding to developed startups.

Mega/Large Buyout – Any buyout fund larger than a certain fund size that depends on the vintage year.

Mezzanine – Includes any PM fund that primarily invests in the mezzanine debt of private companies.

Multi-Stage VC – A venture capital strategy that provides funding to startups across many investment stages.

Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.

Origination – Includes any PM fund that focuses primarily on providing debt capital directly to private companies, often using the company’s assets as collateral.

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

Real Assets – Real Assets includes any PM fund with a strategy of Infrastructure, Natural Resources, or Real Estate.

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

ROW – Any fund with a geographic focus outside of North America and Western Europe.

ROW Equity – Includes all buyout, growth, and venture capital-focused funds, with a geographic focus outside of North America and Western Europe.

Secondary FoF – A fund that purchases existing stakes in private equity funds on the secondary market.

Seed/Early VC – A venture capital strategy that provides funding to early-stage startups.

SMID Buyout – Any buyout fund smaller than a certain fund size, dependent on vintage year.

U.S. Mega/Large – Any buyout fund larger than a certain fund size that depends on the vintage year and is primarily investing in the United States.

U.S. SMID – Any buyout fund smaller than a certain fund size that depends on the vintage year and is primarily investing in the United States.

U.S. & EU Growth – Includes all growth equity funds investing in North America and Western Europe.

U.S. & EU VC – Includes all venture capital funds investing in North America and Western Europe.

VC/Growth – Includes all funds with a strategy of venture capital or growth equity.

Venture Capital – Venture Capital incudes any PM fund focused on financing startups, early-stage, late stage, and emerging companies or a combination of multiple investment stages of startups.

Index Definitions

Barclays U.S. Corporate Aggregate Index – Tracks the performance of U.S. fixed rate corporate debt rated as investment grade.

BofAML High Yield Index – The BofAML High Yield index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.

Credit Suisse High Yield Index – The Credit Suisse High Yield index tracks the performance of U.S. sub-investment grade bonds.

Credit Suisse Leveraged Loan Index – The CS Leveraged Loan Index represents tradable, senior-secured, U.S. dollar-denominated non-investment grade loans.

DJ Brookfield Global Infrastructure Index – The DJ Brookfield Global Infrastructure Index is designed to measure the performance of companies globally that are operators of pure-play infrastructure assets.

FTSE/NAREIR All Equity REIT Index – The FTSE/NAREIT All Equity REIT Index tracks the performance of U.S. equity REITs.

HFRI Composite Index – The HFRI Composite Index reflects hedge fund industry performance.

MSCI USA Small Cap Value Index – The MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the U.S. equity market.

MSCI World Energy Sector Index – The MSCI World Energy Sector Index measures the performance of securities classified in the GICS Energy sector.

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

Russell 3000 Index – The Russell 3000 Index is composed of 3000 large U.S. companies, as determined by market capitalization.

S&P 500 Index – The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.

Other Definitions

Desmoothing – A mathematical process to remove serial autocorrelation in the return stream of assets that experience infrequent appraisal pricing, such as private equity. Desmoothed returns may more accurately capture volatility than reported returns. The formula used here for desmoothing is:

  Where rD(t) = the desmoothed return for period t, r(t) = the return for period t, ρ = the autocorrelation

  rD(t) = (r(t) – r(t-1) * ρ) / (1 – ρ)

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.

Sharpe Ratio – The Sharpe Ratio is the average return earned in excess of the risk-free rate per unity of volatility or total risk.

Time-weighted Return – Time-weighted return is a measure of compound rate of growth in a portfolio.

Volatility – Volatility is a statistical measure of dispersion of return, specifically standard deviation.

15-Year Asset Class Performance Chart: 15-Year Asset Class Performance: Indices used: Hamilton Lane All Private Markets with volatility desmoothed; Hamilton Lane All Private Equity ex. Credit and Real Assets with volatility desmoothed; S&P 500 Index; Russell 3000 Index; MSCI World Index; HFRI Composite Index; Hamilton Lane Private Credit with volatility desmoothed; Credit Suisse High Yield Index; Barclays Aggregate Bond Index; Hamilton Lane Private Real Estate with volatility desmoothed; Hamilton Lane Private Infrastructure with volatility desmoothed; Hamilton Lane Private Natural Resources with volatility desmoothed; FTSE/NAREIT Equity REIT Index; DJ Brookfield Global Infrastructure Index; MSCI World Energy Sector Index. Geometric mean returns in USD. Assumes risk free rate of 2.4%, representing the average yield of the ten-year treasury over the last fifteen years. 

Spread of Returns by Down and Up Markets Chart: Spread of Returns by Down and Up Markets: Up markets are defined for equity strategies if the vintage year was above 11% IRR and down otherwise. Real Estate and credit strategies had a threshold of 9% for up markets. 

Real and Nominal Return of Select Asset Classes Chart: Real and Nominal Return of Select Asset Classes: All inflationary periods since 1928 are defined as years where inflation was above the median level of 2.7% and increased over the respective year by more than 1%. Nominal returns taken as the median within the respective high and low inflationary periods. Real returns for both U.S. Bonds and Private Credit calculated as [(1+median nominal return)/ (1+Inflation in the median nominal return period)]-1.U.S. Bond returns calculated using a mix of 50% US T.Bond and 50% Baa Corp Bond annual returns.

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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