Golding Capital Partners, one of Europe’s leading independent asset managers for alternative investments, has analysed the magnitude and repeatability of alpha returns from private equity investments compared with the stock market.
The study carried out in association with Professor Oliver Gottschalg from HEC School of Management Paris shows that the excess return from private equity is persistent over the period 2000-2021.
The average alpha compared with similar stock market investments is 9.9 per cent, rising to as much as 35 per cent during periods of crisis.
The study indicates that the driver for recurrence of attractive alpha is not the track record at the asset manager level, but rather the earlier performance of the individuals directly involved in the respective transactions.
The current study is the fifth time that Golding has worked with Professor Gottschalg to analyse the excess return from private equity compared with the public markets, by calculating the alpha factor delivered by in private equity transactions. The latest survey took a particularly close look at human expertise involved.
During recessionary times with poor stock market performance, alpha for private equity is particularly high, at an average of 35 per cent over the comparable return from public markets. In phases of rapid economic growth with stock markets appreciating by over 15 per cent pa, alpha comes to some 26 per cent, by contrast. In an environment of moderate growth, private equity also generates an alpha of nearly 11 per cent. In a stable environment with a slightly positive or slightly negative stock market return, alpha is still 5 per cent.
In terms of the individual market segments, alpha is also significant across the most diverse sectors of the economy. The excess return is particularly marked in the communications and energy sectors, at 15.5 per cent and 13.6 per cent, respectively. Alpha was less strong in the consumer goods and healthcare sectors, with figures of 8.1 per cent and 8.5 per cent, respectively.
The alpha study is based on data from around 4,300 individual realised transactions in the Golding transaction database. This dataset not only makes it possible to calculate average figures for alpha, but also to differentiate between individual market phases and segments. Furthermore, the study goes beyond the scope of earlier investigations by not only examining absolute return metrics such as IRR or TVPI, but also the alpha outperformance.
The results provide strong empirical evidence for the positive persistence of private equity’s alpha factor over a longer timeframe.
