Is Private Equity Different from Public Equity?

Abstract

Private equity is a form of equity and is raised by companies that are not listed on exchanges; their shares do not trade on stock exchanges. Such private equity investments are done in high-growth companies where potential for exponential return is very high. The question arises whether private equity performance is related to public equity performance. In this article, the authors took the US Private Equity Index as the dependent variable and three market indices—S&P 400 (mid cap), S&P 500 (large cap), and S&P 600 (small cap)—as independent variables. The factor analysis, along with weighted least squares regression, was used to determine the relationship. The analysis showed that there is no significant relationship between variance of returns of the US-based Private Equity Index and the three financial market indices (S&P 400, S&P 500, and S&P 600). The performance and returns of the private equity index is not largely related to the performance of financial markets. The descriptive analysis shows that US private equity is very different from three equity indices in terms of extreme returns, as well as frequent gains and rare losses. Therefore, private equity investment is different from public market investment. The analysis shows that there is no significant relationship between variance of returns of US-based Private Equity Index and variance of returns among various subasset classes of equity, including S&P 400, S&P 500, and S&P 600. The correlation among different subasset classes—including S&P 400, S&P 500, and S&P 600—is very high, but these asset classes have low correlation with the US Private Equity Index. The US Private Equity Index is closely associated with large cap (S&P 500) and mid cap (S&P 400) in terms of risk profile, as well as frequent gains and rare larger losses.

TOPICS: Real assets/alternative investments/private equity, private equity, exchanges/markets/clearinghouses

Key Findings

• ▪ How private equity index’s performance is affected by performance of equity financial markets.

• ▪ The variance of returns of private equity index’s is marginally influenced by the variance of returns of equity market indices, including the S&P 400, S&P 500 and S&P 600.

• ▪ The overall performance of the private equity index is not influenced by the performance of equity financial markets.