The initial academic work on the returns of private equity investments generally found underperformance relative to public market benchmarks like the S&P 500. More recent research, which apparently uses higher-quality data, is coming to the opposite conclusion. But is it really? Professor Ludovic Phalippou from the University of Oxford argues that while this recent research appears to be valid, the S&P 500 isn’t the right benchmark.
The debate about whether the size and value premiums have existed on paper was settled many years ago. The long-term historical data clearly shows robust size and value premiums. The average annual U.S. size and value premiums have been 3.6 and 4.8 percent, respectively, from 1927-2012. What has been more hotly debated, however, is whether these premiums could actually be captured in the real world net of transactions costs and fund expense ratios. In my opinion, even this debate is a bit silly at this point. If you examine the returns of intelligently built, low-cost mutual funds that have been designed specifically to capture these premiums, it’s clear they’ve been successful.