Is Private Equity Still Beating Public Markets? A 2025 Performance Scorecard

From financial engineering to operational excellence, private equity's value creation playbook has evolved since 2008, proving its resilience despite temporary setbacks.

Since 2000, Private Equity (PE) has consistently delivered exceptional returns for its investors, and the fund managers managed to create nearly three times more wealth than a comparable S&P 500 benchmark. According to MSCI Private Capital Solutions, private equity generated a net annualized time-weighted return of 13% compared to 8% generated by the Russell 3000 index.

Private equity also has a record of 10-year net returns over public indices in 97 out of the last 100 quarters. However, 2024 has been a letdown for private equity in general, as the Cambridge Associates US Private Equity Index® reported an 8.1% increase in 2024; meanwhile, the S&P mPME index grew almost 25% in the same fiscal year.

The AI boom helped the large-cap tech stocks as they have seen significant surges, which led the benchmark index to new highs. At the same time, the Private Equity returns have delivered more muted returns, primarily due to high-valuation investments made in 2021-2022.

Table 1: Annual Returns Across Public and Private Market Benchmarks (2020–2025*)

*_estimates

Source: Morningstar

To understand why Private Equity is underperforming, it is essential to know how Private Equity firms create value. Private Equity firms, in general, use financial engineering or leverage as a key to improve the investor's returns. Three key drivers dictate the success or failure of PE firms: Buy Well, Build Well, and Sell Well.

The publicly listed and private equity firm valuations tend to move in tandem; however, significant deviations occur when the market is bearish. For instance, PE firms managed the global financial crisis and the recent pandemic, and the interest rate hiking cycle was much better than any open-ended or exchange-traded fund. It is primarily due to the value creation changes they implemented after 2000 and 2008, with an increased focus on operational improvements over using financial leverage.

Value Creation (Pre-2000 vs Post-2008)

Despite recent headwinds, most institutional investors (Limited Partners) plan to maintain or increase their PE allocations in 2025, citing superior risk-adjusted returns. An elemental concept in private equity is the "J-Curve effect"; this effect describes that if a PE fund underperforms, it is because the initial returns are often negative due to set-up costs, management fees, and the gradual capital deployment in a business. As the companies mature and are eventually sold at a profit, the fund's performance gradually turns positive and then accelerates, resembling the letter "J" on a graph.

Despite the recent underperformance, A McKinsey & Company survey conducted in mid-2025 revealed that 84% of Limited Partners (LPs) expect to hold or even increase their allocations to private equity throughout 2025 as they expect big things from the PE. Additionally, a substantial share of these LPs (63%) cited PE's superior risk-adjusted returns compared to other asset classes as a primary reason for their continued commitment.

Investors must understand the process's risks and aim for a multi-year commitment if they want to invest in a PE firm. The investor should also ensure that their financial plan can handle PE's lack of liquidity. Before investing in PE, the investor should focus on Realized Returns such as Distributions to Paid-In Capital (DPI), which shows the actual cash returned. It is also recommended to seek a qualified financial advisor to help determine if it's the right fit for your portfolio.

The challenges presented in 2024 more than clearly highlight the need for disciplined manager selection, careful liquidity planning, and patience. The key question for the investors is not whether private equity will deliver, but whether they are prepared to commit the time, capital, and strategy required to grasp its full value.