Private equity vs. public markets: Time-tested advantages can be masked by short-term comparisons

Private equity investments have struggled to keep up with public stock markets in recent years. In 2023 and 2024, private equity returns lagged the S&P 500 by about 17% each year.¹ This has led many investors to question whether private equity deserves a place in their investment portfolios.

The main reason for this performance gap is that public stock markets experienced dramatic growth during this period, largely driven by excitement about artificial intelligence and the strong performance of major tech companies. These few companies make up over 30% of the S&P 500's total value, so their success has had an outsized impact on overall market returns.²

Meanwhile, private equity has been dealing with its own challenges. Many private equity firms spent 2023 adjusting their portfolio company values downward after the inflated prices of 2021 and 2022. Deal activity slowed significantly as buyers and sellers couldn't agree on fair prices, and many companies that might’ve normally gone public stayed private because the IPO market remained largely closed.

Why private and public markets move differently

Private equity and public stock markets don't always move in sync. Public stocks are traded every day, with prices changing constantly based on earnings reports, economic news, and investor emotions. Private equity investments, on the other hand, are typically valued only once per quarter and, in our opinion, are based more on the actual performance of the underlying companies rather than market sentiment.

This difference becomes more pronounced during periods of extreme market movements. When public markets surge or crash, private equity tends to be more stable because it's not subject to the daily swings of public market investors.

The market environment in 2023, 2024, and to some extent again in the first half of 2025 has been a great example of this pattern. Public markets have been driven largely by valuation increases—meaning investors are willing to pay more for the same earnings. The S&P 500's price-to-earnings ratio has expanded significantly, while private equity valuations have remained relatively stable.

The long-term advantage

While recent performance has been disappointing for private equity investors, history suggests this is temporary. Looking at longer time periods tells a different story about the opportunity in private equity.

Exhibit 1 shows a diversified U.S. private equity benchmark³ approximately doubling the index level increase of the S&P 500 Index⁴ during a 20-year observation period.

Exhibit 1: 20-year growth: S&P 500 Index⁴ versus Cambridge Associates U.S. private equity benchmark³

Source: Cambridge Associates, Factset. Data from January 1, 2004 through December 31, 2024. Index levels were rebased to 100 on December 31, 2003. Cambridge Associates data collected via LSEG Private Equity Benchmarking App.  Benchmark included = Cambridge Associates U.S. Private Equity Index, which includes 1,635 Buyout and Growth Equity funds from vintage years 1986 to 2024.
Past performance is no guarantee of future results. All investments involve risks, including possible loss of principal. Indexes are unmanaged and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Private Market Investment Risks: Private market investing consists of investing in private securities that are illiquid and thinly traded, which may limit the ability to sell such securities at their fair market value or when necessary to meet a portfolio's liquidity needs. Investing in privately held securities presents certain challenges and involves incremental risks as opposed to investments in public securities, such as dealing with the lack of available information about private securities as well as their general lack of liquidity. Private securities are not required to provide periodic pricing or valuation information to investors and may involve complex tax structures and delays in distributing important tax information. Private equity funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.
Equity Securities Investment Risks: Equity securities are traded on exchanges with prices available daily and liquidity readily provided by market makers. Such securities are also subject to price fluctuation, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

Perhaps just as importantly, private equity has historically provided better protection during market downturns.

During major market crashes—like the dot-com bubble burst in 2000-to-2002, the financial crisis of 2008-to-2009, and the early COVID-19 pandemic in 2020—the Cambridge Associates U.S. private equity benchmark consistently fell by less than the S&P 500.

Exhibit 2: Private equity has historically delivered comparably modest losses during steep selloffs in public equities

Source: Cambridge Associates, Factset. Cambridge Associates data collected via LSEG Private Equity Benchmarking App.  Benchmark included = Cambridge Associates U.S. Private Equity Index, which includes 1,635 Buyout and Growth Equity funds from vintage years 1986 to 2024. Data as of 12/31/2024.
Past performance is no guarantee of future results. All investments involve risks, including possible loss of principal. Indexes are unmanaged and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Private Market Investment Risks: Private market investing consists of investing in private securities that are illiquid and thinly traded, which may limit the ability to sell such securities at their fair market value or when necessary to meet a portfolio's liquidity needs. Investing in privately held securities presents certain challenges and involves incremental risks as opposed to investments in public securities, such as dealing with the lack of available information about private securities as well as their general lack of liquidity. Private securities are not required to provide periodic pricing or valuation information to investors and may involve complex tax structures and delays in distributing important tax information. Private equity funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.
Equity Securities Investment Risks: Equity securities are traded on exchanges with prices available daily and liquidity readily provided by market makers. Such securities are also subject to price fluctuation, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

The power of patient capital

We believe private equity's advantage becomes clear when you look at how it handles market volatility. While public markets are often subject to emotional investor decisions—such as buying when markets are high and selling when they're low—private equity may maintain a more disciplined, long-term approach.

During market stress, private equity managers can continue to invest and improve their companies. They're not forced to sell at bad times, and they may find attractive investment opportunities when others are retreating from the market.

Looking forward

The recent disconnect between private and public market performance is consistent with historical patterns and we believe it will be temporary. Private equity continues to offer several possible advantages that may make it valuable for patient, qualified, long-term investors: diversification benefits, opportunities for steady compounding of returns, and the potential for enhanced performance through active management.

Private equity managers have access to detailed company information and can make operational improvements that public market investors cannot. They can pursue strategic acquisitions, restructure operations, and make long-term investments without worrying about short-term market reactions.

For investors considering private equity, a key lesson is patience. While public markets may outperform in the short term—as they have recently—we believe private equity's value proposition becomes clear over longer time horizons. Making investment decisions based on one or two years of performance data is generally not advised for any asset class, and especially not for illiquid, long-term investments like private equity.

This article summarizes our comprehensive research on the performance of private equity investments over time. You can read our full-length analysis here.

 

 

 

1. According to the Cambridge Associates U.S. Private Equity Index
2. Companies representing 30% of the S&P 500’s total value as of June 13, 2025 include Nvidia, Meta, Tesla, Amazon, Google, Apple, Microsoft.
3. The Cambridge Associates U.S. Private Equity Index is based on the historical performance records of 1,635 Buyout and Growth Equity funds from vintage years 1986 to 2024. Returns are annualized, with the exception of returns less than one year, which are cumulative. Because the Index is capitalization weighted, the largest vintage years mainly drive its performance. The pooled returns represent the net end-to-end rates of return calculated on the aggregate of all cash flows and market values as reported to Cambridge Associates by the funds’ general partners in their quarterly and annual audited financial reports. These returns are net of fund management fees, expenses, and performance fees that take the form of a carried interest.
4. The S&P 500 Index is a market capitalization weighted index consisting of the 500 largest, profitable U.S.-based public companies.