Key Takeaways
- • Private equity valuations trade at a 29% discount to public equities (S&P 500) on an EBITDA multiple basis over the 27-year period from 1997 through Q3 2024, according to Cliffwater analysis using PitchBook and S&P Dow Jones data.
- • State pension allocations to private equity generated 11% annualized net-of-fee returns over 23 years ending June 30, 2023, outperforming the CRSP 1-10 US total market index (7.2%) and MSCI All Country World ex USA Index (4.4%) by 380 and 660 basis points, respectively.
- • The private equity valuation discount produces approximately 3% higher earnings yield relative to public stocks, accounting for roughly half of private equity's historical outperformance versus US public equities, with multiple convergence contributing an additional estimated 3% gross return.
- • The valuation discount has remained consistently positive throughout the 27-year measurement period and currently sits near its long-term average, suggesting structural pricing inefficiencies persist in the private equity market.
Summary
Private equity continues to offer compelling risk-adjusted returns relative to public equity markets, supported by persistent valuation discrepancies between the two asset classes. Research from Cliffwater, utilizing PitchBook and S&P Dow Jones data spanning 1997 through the third quarter of 2024, reveals that US buyouts trade at a 29% discount to the S&P 500 when measured by EBITDA multiples—the ratio of total economic value (equity plus debt) to EBITDA earnings. This discount, while fluctuating over the 27-year period, has remained consistently positive and currently hovers near its historical average.
The historical performance data underscores the value proposition embedded in this valuation differential. According to Stephen Nesbitt, chief investment officer and CEO of Cliffwater, state pension allocations to private equity delivered 11% annualized net-of-fee returns over the 23-year period ending June 30, 2023. This substantially exceeded returns from the CRSP 1-10 Index, which represents the total US market and returned 7.2% annualized, as well as the MSCI All Country World ex USA Index, which returned 4.4% annualized over the same timeframe.
The outperformance differential is attributable to two primary sources. The 29% valuation discount translates into approximately 3% higher earnings yield on private equity investments relative to public stocks, accounting for roughly half of private equity's 380 basis point outperformance versus US equities. The remaining performance contribution—estimated at approximately 3% gross return—derives from multiple convergence, reflecting the historical tendency for private equity multiples to move toward public market levels either through operational improvements or market repricing. Assuming conservatively that convergence captures between zero and six percent in additional returns, the combined effect of the earnings yield advantage and multiple expansion produces an estimated 6% excess gross return for private equity before accounting for fees and expenses.
The persistence of the valuation discount across nearly three decades, coupled with its current positioning near long-term averages, suggests that structural pricing inefficiencies continue to characterize the private equity market. For institutional investors evaluating asset allocation decisions, this discount implies that private equity investments remain attractively positioned relative to public market alternatives on a fundamental value basis.
The historical performance data underscores the value proposition embedded in this valuation differential. According to Stephen Nesbitt, chief investment officer and CEO of Cliffwater, state pension allocations to private equity delivered 11% annualized net-of-fee returns over the 23-year period ending June 30, 2023. This substantially exceeded returns from the CRSP 1-10 Index, which represents the total US market and returned 7.2% annualized, as well as the MSCI All Country World ex USA Index, which returned 4.4% annualized over the same timeframe.
The outperformance differential is attributable to two primary sources. The 29% valuation discount translates into approximately 3% higher earnings yield on private equity investments relative to public stocks, accounting for roughly half of private equity's 380 basis point outperformance versus US equities. The remaining performance contribution—estimated at approximately 3% gross return—derives from multiple convergence, reflecting the historical tendency for private equity multiples to move toward public market levels either through operational improvements or market repricing. Assuming conservatively that convergence captures between zero and six percent in additional returns, the combined effect of the earnings yield advantage and multiple expansion produces an estimated 6% excess gross return for private equity before accounting for fees and expenses.
The persistence of the valuation discount across nearly three decades, coupled with its current positioning near long-term averages, suggests that structural pricing inefficiencies continue to characterize the private equity market. For institutional investors evaluating asset allocation decisions, this discount implies that private equity investments remain attractively positioned relative to public market alternatives on a fundamental value basis.
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