Private Firms Earn 3% More

More evidence that privately owned firms do better:

We present evidence on the performance of nearly 1400 U.S. private equity (buyout and venture capital) funds using a new research-quality dataset. … Average U.S. buyout fund performance has exceeded that of public markets for most vintages for a long period of time. The outperformance versus the S&P 500 averages 20% to 27% over the life of the fund and more than 3% per year. Average U.S. venture capital funds, on the other hand, outperformed public equities in the 1990s, but have underperformed public equities in the 2000s. … Within a given vintage year, performance relative to public markets can be predicted well by a fund’s multiple of invested capital and internal rates of return. (more)

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  • ChristianKl

    It doesn’t seem to be about private ownership but about whether the “public” can invest into the fund.

  • That makes me wonder why more firms do not go private and turn into partnerships to avid the corporate tax. That is if they get no net benefit from being public provides (public companies have more access to funding). Is limited liability that valuable even to safe companies?

  • Matt

    Do they go bankrupt less as well?

  • kebko

    Liquidity is generally regarded as a benefit, so that, even within public firms, investing in less liquid ones (firms where the stock trades at small volumes with large spreads) dependably gives higher returns. This seems like an extension of the same phenomenon. This seems like standard finance theory. It’s not worth holding something in an illiquid form unless you can increase the returns on it. Firms which will not benefit by the change in form will remain public because the value of the firm will be higher as a result (lower returns will be required to justify its value). So, there would probably be some form of selection bias here, also.

  • Douglas Knight

    This says that PE firms produce returns. This seems like it should be obvious, since why else would people invest in them, but the ability of hedge funds to raise money without producing returns is impressive. So it’s good to know that the PE industry is sane.

    But does this address the question of whether concentrated ownership manages better?

    Many people accuse PE firms of stripping companies of subtle organizational capital in a way that fools the stock market, allowing the firm to flip the company and make money for its investors. This should be fairly easy to examine by looking at the (public) performance of companies that IPO out of PE firms. But I haven’t seen anyone do it.

    • Someone from the other side

      I forgot where I saw it, but most PE backed IPOs fare fairly well.

      You might actually expect that, seeing that most of the big PE firms want to avoid IPOs because they try to exit through IPOs repeatedly – getting a reputation of screwing investors would be bad for the following funds,…

      • Douglas Knight

        Lots of people claim to have seen such studies, but they never cite them and don’t agree on precise claims, like whether Milkin-financed companies did better or worse than the market. Note that I’m talking about long-term returns. Say, 10 years.

  • Poelmo

    Rule of thumb: don’t just assume financial corporations earn all of their money (reaping money through casino schemes funded by free fed money is not the same as earning money)

  • Ddd