Investors in the private markets are typically focused on private markets performance in two ways:

• How have the private markets performed?
• How does that performance compare to the public markets?

Using Cobalt LP’s benchmark and industry-level data, we’re able to take a look at both of these areas.

Private Markets Performance – The Value of a Dollar

If you invested one dollar at the start of 2016, where would you have invested it? As the chart below displays, that dollar would be worth quite a bit more today whether it went into bonds, global equities or US equities. However, the chart shows that private equity is where your dollar did best.

Private Markets Performance – Over Varying Time Frames

Most investors are also looking at returns within a specified time frame, quarter by quarter, year by year. If we look at the private markets this way, can they continue to outperform the public markets? If so, can they outperform with the margins that investors expect?

While complicated, we do think that these charts above help tell an important story. The biggest takeaway is that only focusing on one time frame can lead to misleading results. It’s important to analyze performance over more than one time frame. Additionally, when that time frame starts and stops makes a big difference.

• For example, over longer-term horizons, the private markets outperformed on an absolute and risk-adjusted basis (even after de-smoothing volatility).
• Additionally, it’s important to remember that the 10-year performance charts capture a decade of measurement. In fact, this decade started at the bottom of one of the greatest bull markets in history. Even during that time period, both private equity and private credit outperformed each of their respective public market comparables.
• Lastly, when you measure on a three-year basis, the private markets, particularly private equity, really has started to demonstrate their outperformance.

Another important takeaway is that benchmark choice is crucial. Investors will see different performance depending on what benchmark they use each quarter. For instance, private equity’s outperformance has been far greater compared to the MSCI World Index rather than a US-oriented benchmark.

Closing Thoughts

Investors might choose to invest in the private markets due to the historical outperformance. In fact, our data shows that the private markets have generally outperformed the public markets historically. However, we believe that the growth of the private markets requires the requisite 300+ basis point outperformance that most investors look for in their private markets portfolios. If this changes, does this impact investors’ willingness to invest in the asset class?

To learn more about the data used in this analysis and how you can leverage this to power your own portfolio analysis, click here.

Definitions:

Global Equities – Represented through the MSCI World Index.
Private Equity – A broad term used to describe any fund that offers equity capital to private companies.
Private Credit – This strategy focuses on providing debt capital.
Private Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
S&P 500 Index – The S&P 500 Index tracks the 500 largest companies based on market cap of companies listed on NYSE or NASDAQ.
Russell 3000 Index – The Russell 3000 Index is composed of 3000 large US companies, as determined by market capitalization.
MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
Hedge Funds – Represented through the HFRI Composite Index which reflects hedge fund industry performance.
Credit Suisse High-Yield Index – The Credit Suisse High Yield index tracks the performance of US sub-investment grade bonds.
Barclays Aggregate Bond Index – The Barclays US Corporate Aggregate Index tracks the performance of US fixed rate corporate debt rated as investment grade
Private Infrastructure & Natural Resources – Includes any PE fund with a strategy of either Infrastructure or Natural Resources. Real Estate funds are not included.
FTSE NAREIT All Equity REITs Index – The FTSE/NAREIT All Equity REIT Index tracks the performance of US equity REITs.
S&P Global Infrastructure Index – The S&P Global Infrastructure Index tracks the performance of 75 companies from around the world that represent the infrastructure industry.
MSCI World Energy Sector Index – The MSCI World Energy Sector Index measures the performance of securities classified in the GICS Energy Sector.