Get the Industry Trends Report
Back to blog December 08, 2017 2 Comments Author: Andy Jones

Private Equity Investments in Public Companies (Part 3)

A year ago, I created a portfolio of 655 publicly-traded stocks based on private equity ownership in each company. I called it the “PE-basket”.

When I checked the performance of this PE-basket at the 6-month mark, it was lagging the performance of the general market. However, now that a full year has passed, the PE-basket has in fact out-performed the broad market as well as the other benchmarks I selected.

Publicly traded PE-owned portfolio companies

One might argue that the S&P 500 and the Russel 2000 are not good benchmarks for the PE-basket. I agree. But, PSP, which tracks the performance of publicly-traded private equity firms, is a direct benchmark and an appropriate comparison. The PE-basket trounced PSP, posting nearly 6% more return.

I did not track the relative volatility to weigh in on the return-vs-volatility discussion. I also ignored dividends, which likely would have given SPY a better showing in comparison. However, it is interesting to note that the median portfolio company in the PE-basket only returned 3.9%. The 20.5% total return therefore relies heavily on a small group of star performers. Specifically, the top 5% of performers in the PE-basket delivered 90% of the total gains. These out-sized gains had to cover the losses posted by 45% of the companies in the basket.

NOTE: Just to be clear, this is not the ROI for private equity firms’ investments overall, but only those PE-owned portfolio companies that were publicly-traded and therefore easily valued.

If your firm creates tradable replicating portfolios (ETF-like instruments), and would like to use our data to construct a “publicly-traded private equity holdings” fund, contact me to discuss this in more detail.

2 Comments:

Fred Croft 11 months ago

The difference between the PSP and your index may be partially a function of portfolio company size: the large PE firms seem to pack their publicly-traded arms with pieces of large, mature companies.

Andy Jones 11 months ago

Fred, thanks for your comment. You make a good point. The portfolio company holdings in the PE-basket we identified are mostly small-cap stocks.