Private markets have soared to $10 trillion in AUM. But why have they underperformed public markets?

Private markets have emerged as a multitrillion-dollar force, with assets under management reaching $10–$13 trillion, fundamentally reshaping the landscape of institutional investment. This explosive growth reflects a broader structural transformation in global capital markets known as "de-equitisation"—a decades-long decline in the supply of publicly traded equities. Since 1995, the universe of listed companies in developed markets has contracted by 36%, with the US experiencing a particularly severe 52% decline from approximately 7,300 public companies in 1996 to around 4,300 today. Regional exchanges have been especially hard hit; the London Stock Exchange's FTSE indices have experienced 15–48% reductions in trading company counts over the past five years.

Despite their explosive growth and concentrated investor focus, private markets have underperformed public equities over recent periods, contradicting conventional institutional wisdom about private equity's superior return potential. According to research by Ashley Lester, Luis O'Shea, and Patrick Warren analyzing the MSCI private-capital universe covering 14,453 funds and nearly $12 trillion in committed capital, buyout funds generated annualized excess returns of just 3.8% net of all fees from 1994 through September 2024, while the broader private equity universe achieved only 2.0% in excess returns. These findings, grounded in actual Limited Partners' cash-flow data and benchmarked against the MSCI ACWI Index, suggest that long-term outperformance is both modest and inconsistent—a significant divergence from industry marketing narratives emphasizing double-digit alpha generation.

Performance variability is pronounced and driven by vintage and market-cycle dynamics. Venture capital experienced a prolonged stretch of disappointing returns between the dot-com bust and the 2008 financial crisis, though subsequent vintages have recovered to generate 1.6% in adjusted excess returns. Private equity's cyclical underperformance during periods of capital inflows and market exuberance indicates that rapid asset growth itself may compress returns through elevated entry valuations and increased competitive pressure. Systematic portfolio construction differences compound the performance challenge: private equity is structurally overweight US companies, buyout portfolios employ greater financial leverage than public-market comparables, and venture-backed companies exhibit higher systematic risk (beta), each factor potentially contributing to the modest risk-adjusted outperformance observed.

The structural shift toward private markets reflects genuine economic dynamics. High-growth companies are choosing to remain unlisted for longer periods, thereby locking traditional public equity investors out of steepest-phase value creation. Private capital pools have grown to encompass nearly 25 times the number of companies available in public markets, though representing only 12% of total market capitalization. This evolution is increasingly essential to meeting global infrastructure demands; McKinsey estimates $106 trillion in capital requirements through 2040, positioning private equity and venture capital as indispensable components of diversified institutional portfolios rather than niche alternative allocations.