The Economics of Private Equity: A Critical Review

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class="spotlight-hero__meta spotlight-max-width-item items--piped"> <span class="items__item">14 May 2024</span> <span class="items__item">Research Foundation</span> </span> <h1 class="spotlight-hero__title spotlight-max-width-item"> The Economics of Private Equity: A Critical Review </h1> <h2 class="spotlight-hero__subtitle spotlight-max-width-item"> Published by CFA Institute Research Foundation </h2> </div> </div> </div> </section> <section class="article-grid">  <section class="grid__item--full-width grid__item--inset grid__item--initial">  <div class="grid__container grid__container--normal-column-gap">  <article class="grid__item--article-body"> <section class="authors__container grid__item--article-element theme--insights"> <ol class="authors__list"> <li class="authors__item">Alexander Ljungqvist</li> </ol> </section>  <section class="share"> Share this: <ol class="inline-list"> <li class="share__item" title="Share on Facebook"> <a 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class="overview grid__item--article-element"> <span class="overview__content"> Private equity is a $3 trillion asset class, attracting many investors. This literature review synthesizes the main insights of the academic literature on private equity, focusing on its performance, value creation, and key aspects for investors. </span> </section>    <section class="grid__item--article-element"> <a class="content-asset content-asset--primary" href="/-/media/documents/article/rf-brief/economics-of-private-equity.pdf" > <span class="content-asset__type icon icon--asset-pdf "></span> <span class="content-asset__title"> <span class="content-asset__emphasis">The Economics of Private Equity: A Critical Review</span> Read PDF </span> </a> </section>    <section class="grid__item--article-element book__cover-image"> <img src="/-/media/images/book-cover/cover-private-equity.jpg?w=255&hash=7D711AE86AE317B55ABC0013022BFF33" alt="The Economics of Private Equity: A Critical Review" class="article-cover" /> </section>   <section class="grid__item--article-element"> <h2 class="article__title">Overview</h2>  <div class="article__paragraph"> <p>Private equity (PE) has grown into a sizable asset class, with many institutional investors allocating significant portions of their portfolios to PE. This critical review of the academic literature focuses on PE funds that acquire mature companies. Topics covered include PE fund performance, value creation, and key aspects relevant to investors in PE funds. </p> <p>Regarding PE performance, PE funds have historically outperformed public market indices after fees, but it is unclear whether this outperformance persists when adjusted for risk, leverage, and illiquidity. Measuring performance, however, is complicated by the opaque and illiquid nature of the asset class.</p> </div>  </section>   <section class="grid__item--article-body-float-right call-out theme--insights"> <a class="call-out__link" href="/en/research-foundation/donate" > <div class="call-out__title"> </div> <div class="call-out__media"> <img class="media__ratio--wide media__fit--cover" src="/-/media/images/hero/derivative-content-modules/RF-ad-for-RPC-site.png?w=636&hash=745F071E233BDEED368EC6024BE856CA" alt="Research Foundation Ad"> </div> <div class="call-out__content"> <span class="call-out__cta"> Support Professional Excellence </span> <p class="call-out__description"> Support Research for the Global Investment Community. Your donation raises professional excellence and enables the foundation to continue its important mission to fund, publish, and distribute in-depth, high quality, independent research. </p> </div> </a> </section>   <section class="grid__item--article-element">  <div class="article__paragraph"> <p>In terms of value creation, PE portfolio companies undergo significant operational changes during the ownership period, but it remains an open question whether PE ownership caused these changes or if they would have occurred anyway. The literature review also discusses the potential for PE to create social value.</p> <p>From the limited partner perspective, the literature emphasizes the importance of manager selection and the challenges of investing in PE, including diseconomies of scale, potential conflicts of interest, and the rise of co-investment and direct investment programs. The review also touches on recent developments in PE, such as the growth of secondary buyouts, general partner–led secondaries, and increasing focus on environmental, social, and governance (ESG) considerations.</p> <p>In conclusion, the literature review suggests that although PE has received significant attention from financial economists, open questions for future research remain as the asset class continues to evolve and innovate.</p> </div>  </section>   <section class="grid__item--article-element article-meta__container pl-credit"> <div class="pl-credit__group"> <span class="pl-credit__header">CFA Members Earn</span> <span class="pl-credit__value">1PL</span> </div> <div class="pl-credit__group"> <a id="linkRecordPL" class="pl-credit__record" href="#" 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