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.

In his paper, Phalippou finds that the average buyout fund outperformed the S&P 500 by roughly 5.7 percent per year. This is obviously a significant amount of outperformance. Taken at face value, it suggests that buyout funds have delivered an enormous amount of alpha relative to public equity markets. He, however, notes: According to the most comprehensive set of publicly available data on the companies that buyout funds purchase, 95 percent of the purchases were for companies with enterprise values of less than $1.08 billion. This is solidly within the realm of small-capitalization stocks, rendering the S&P 500 comparison inaccurate. On a smaller sample of acquisitions, Phalippou also finds that the median acquisition was done at a price/book ratio of 0.50, which is a very deep value bias.

These two findings indicate that a small-value index or a small-value fund would be a better benchmark. When using either, the outperformance disappears. In fact, he finds that the performance of buyout funds is, on average, identical to the performance of DFA Small Value. Taking his analysis one step further and adjusting for the leverage that is frequently used by buyout funds to acquire companies, Phalippou finds that buyout funds have actually underperformed DFA Small Value by about 1 percent per year.

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Jared Kizer is the director of investment strategy for the BAM ALLIANCE. See our disclosures page for more information. Follow him on Twitter.