We have all heard the comment that your private equity portfolio is riskier than your public equity portfolio. But, is this true? How do you even measure risk in private equity? Glad you asked. We, at Cobalt, think of measuring risk in private equity in two ways: versus short-term Treasuries and looking at returns.
Measuring Risk through Treasury Bills
If we measure risk as the percentage that outperforms 1-3 month treasury bills, we get some interesting takeaways. As the chart below shows, slightly less than half of US public stocks outperformed short-term Treasuries.
Comparably, more than 80% of buyout funds have outperformed that same measure. Some may argue that comparing a single stock to a basket of investments is not a fair comparison. Fair enough, let’s use buyout deals as a better comparison. If we do that, more than 60% of buyout deals have outperformed Treasuries.