Lag effect in private equity, or “Where are my returns?”

July 2023

Over long time periods, private equity has outperformed public equity. However, there have been periods, including the first half of 2023, where private equity appears to underperform public equity. This apparent private equity underperformance can happen when public equity markets are rising, while conversely, private equity can appear to outperform when public equity markets are falling. Over long periods of time, these differences balance out and private equity has shown to outperform public equity.

While in some ways, equity is equity, whether private or public, there are some important distinctions between public and private. The observed volatility for private equity appears to be less than public equity. Driving this is that unless there is a significant event, private equity portfolio company valuation models tend to result in much more stable values than those determined in daily priced public markets. Further, private company valuations can be lagged 3 months or more and are generally updated on a quarterly basis.

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