Buyouts have consistently outperformed...and it’s not because of leverage

Some 2,500 years ago, the Greek storyteller Aesop created his fable, The Tortoise and the Hare, whose moral lesson teaches us that slow and steady wins the race. As an asset class, private equity has proven to be true to this word. Recent performance data indicates that while private equity has faced challenges, it has shown resilience and continues to outperform public markets over the long term, epitomising the concept of investing being a marathon not a sprint.

According to the most recent update of the MSCI Private Capital Universe, global private equity funds returned 5.6% in 2024, with buyout funds, specifically, returning 8.5% . By contrast, the S&P 500 returned in excess of 20% over that same time period.

Widen the time aperture, however, and it is a very different story. Investors who allocated capital to private equity in the year 2000 could have generated three times more wealth compared to public markets.

While the Russell 3000 index delivered a 6.6x net multiple-of-capital over the last 25 years, the Private Equity Index (MSCI Private Capital Solutions) shows that investors in private equity would have recorded a 19.9x net return. In fact, the asset class has proven to be so consistent that it has outperformed public equities in 97 of the last 100 quarters, on a 10-year rolling returns basis, as illustrated in a recent white paper by Dawson Partners, entitled Why Private Equity Wins: Reflecting on a Quarter-Century of Outperformance.

“The takeaway is simple: the opportunity cost of not being invested in private equity is far greater than the cost of being invested in it,” says Dawson managing partner, Yann Robard.

The compounding benefits of being invested in private equity over multiple years become further evident when one looks at annualised time-weighted returns since 2000.

Using the same two reference indices as mentioned above, over the last five years private equity generated 115 basis points of outperformance or alpha over publics. This rose to 217 basis points over the last ten years and then to 486 basis points over the last 25 years; stated another way, since 2000 private equity delivered 13%, on average, based on MSCI Private Capital Solutions, compared to 8%, on average, for the Russell 3000.

Buy Well. Build Well. Sell Well.

What these figures illustrate is the importance – and potential long-term benefits - for investors to stick with private equity, even if short-term periods of slow dealmaking and exits dominate the industry narrative. Like a time-lapse photograph, where short-term noise can obscure the picture, when viewed over a longer horizon the underlying pattern of consistent outperformance in private equity comes into sharper focus.

“We believe alpha in private equity comes from its model of buying well, building well, and selling well,” says Robard. “The real driver isn’t financial engineering, it’s the hands-on ownership model - expanding margins, improving operations, and building stronger businesses. With deeper engagement and sharper governance, private equity often creates real, not just financial, value. That’s often underappreciated when outsiders look at the returns.”

As well as its historical ability to generate higher returns compared to public equities, private equity has also done so with less volatility, building companies with resilient earnings growth that have allowed them to better navigate market dislocations like the dot com bubble and the GFC. The delta for private equity (the spread between the index’s best and worst quarters over a trailing 10-year period) was 9%. This widened considerably to 20% for public equities.    

“Private equity-owned companies have grown EBITDA at ~11% annually over the past decade, compared to ~7% for public markets. Even in downturns, their earnings have been more resilient: private equity’s worst year of EBITDA growth over the past decade was +6%, versus -13% for publics. That resilience underpins why private equity has delivered higher returns with lower volatility. It shows that risk in private equity isn’t about leverage, it’s about building better businesses that can weather cycles,” explains Robard.

Even though global buyout dry powder has reached approximately $1.2 trillion, there is no indication in historical data that similar periods of elevated dry powder have eroded GP discipline, or returns. Robard states that over the last quarter of a century, buyout entry multiples have consistently remained discounted - about 2.5x lower than public market valuations.

“Even in recent years, with record dry powder, that discount has held or even widened. Put simply, GPs have continued to buy well, even in capital-rich environments,” he says.

Exit Options Improving

That ability to buy well is starting to be reflected in the exit landscape, which is showing signs of warming up again. According to EY’s most recent Private Equity Pulse, exit transactions through the first half of 2025 totalled $308 billion, which is the highest amount in three years. They note that strategic buyers (corporates) were an active liquidity provider, with GPs willing to be more flexible on valuations.  

At the same time, the secondary market remains a critical tool for LPs who are looking to rebalance their portfolios without sacrificing GP relationships or long-term exposure. But as Robard notes, the reality is the market today is long opportunity but short capital; deal flow is abundant, but capital has not kept pace.

The imbalance is stark.

Over the past four years, $620 billion has been deployed into secondaries, but only $423 billion has been raised. That’s the equivalent of 68 cents raised for every $1 deployed, leaving less than a year of dry powder in the market assuming no additional fundraising.

“To close that gap, allocators must direct more dollars to secondaries and if they do, this market has a clear path not just to $200 billion in 2025, but to $1 trillion by 2031. Over time, we believe secondaries will evolve from a backstop for liquidity into a mainstream, proactive portfolio management tool for investors,” states Robard.

Looking ahead, the strong fundamentals that private equity has demonstrated consistently over the years should augur well for further long-term outperformance versus public markets.

The BVCA has suggested that private equity assets under management could double from $5.8 trillion at the end of 2023 to $12 trillion by the end of 2029. They expect private equity to continue outperforming over the medium term, with technology and small- to mid-market buyout funds driving that outperformance.