In the evolving world of finance, investors are increasingly faced with the decision of allocating capital between private equity and public markets. Each asset class offers unique advantages and trade-offs, particularly when considering long-term return potential. This research explores the fundamental differences, historical performance, risks, and suitability of private equity and public markets to determine which offers better long-term returns.

Understanding the Investment Vehicles

Private equity (PE) involves investing directly in private companies or buying out public companies to take them private. These investments are typically managed by private equity firms through pooled funds that acquire, improve, and eventually exit businesses via sales or IPOs. The average holding period for a private equity investment is 7–10 years.

Public markets, on the other hand, involve investing in publicly traded securities such as stocks and bonds. These markets are highly liquid, regulated, and accessible to individual and institutional investors alike. Public equities are subject to daily price fluctuations, transparent reporting, and broader investor scrutiny.

Historical Performance Comparison

Private equity has historically shown an edge in long-term performance, particularly among top-performing funds. According to data from Cambridge Associates, U.S. private equity funds have returned an average net internal rate of return (IRR) of 14%–16% annually over the past two decades. In comparison, the S&P 500 has delivered approximately 9%–10% annual returns during the same period.

A 2020 study by Bain & Company further emphasized that private equity outperformed public markets in nearly 60% of the vintage years from 1995 to 2015. However, this outperformance was largely concentrated in top-quartile PE funds. Median and bottom-quartile funds often underperformed public indices, especially after adjusting for fees, risk, and liquidity.

Meanwhile, public equities—especially diversified index funds—have offered consistent and accessible returns. Long-term investors in broad-based indices like the S&P 500 or MSCI World Index have benefited from compounding growth, dividend reinvestment, and transparent cost structures, usually with lower fees compared to private equity.

Fee Structures and Net Returns

One of the biggest differences in return outcomes stems from fee structures. Private equity funds typically charge a “2 and 20” model—a 2% annual management fee plus 20% of profits (carried interest). These high fees significantly reduce net returns, especially in average-performing funds.

Public markets, by contrast, have seen a race to the bottom in fees, particularly with the rise of passive investing. Index funds and ETFs now offer expense ratios as low as 0.03%, allowing investors to keep more of their returns. Over long periods, this fee advantage can compound significantly.

EQ.1. Internal Rate of Return (IRR) – Key Metric for Private Equity:

Risk and Volatility

Private equity is often perceived as less volatile, but this is somewhat misleading. Since private companies are not marked to market daily, PE investments exhibit smoothed returns. However, this doesn't mean they are inherently less risky. Private equity carries significant liquidity risk, operational risk, and sometimes leverage risk, as many deals are financed with borrowed money.

Public markets are more transparent and volatile due to daily pricing, news flow, and investor sentiment. However, this volatility also presents opportunities for rebalancing and risk management, which are not as readily available in the private equity world.

Liquidity and Accessibility

Liquidity is a major distinction. Public markets allow investors to enter or exit positions within seconds, offering unmatched flexibility. This makes public equities suitable for a wide range of financial goals, including retirement savings, short-term liquidity needs, and tactical asset allocation.

In contrast, private equity funds are illiquid. Investors must commit capital for long periods, and early withdrawals are often not possible without penalty. Furthermore, private equity remains largely inaccessible to retail investors, with most funds requiring high minimum investments and offering limited transparency.

EQ.2. Compound Annual Growth Rate (CAGR) – Often Used in Public Markets:

Market Evolution and Investment Trends

In recent decades, the number of public companies has declined, while private capital has surged. Many high-growth companies now choose to stay private longer, meaning a significant portion of value creation occurs before IPO. This trend has supported the argument that private equity investors gain access to more of a company’s growth potential.

However, public markets have adapted. The rise of specialized ETFs, ESG funds, and active public equity strategies has made it possible to replicate some private equity exposures with public instruments. Additionally, semi-liquid private equity funds and interval funds are bridging the gap, offering partial access to private markets with more manageable liquidity terms.

Conclusion: Which Is Better for Long-Term Returns?

The question of whether private equity or public markets provide better long-term returns does not have a one-size-fits-all answer.

Private equity can deliver superior long-term returns, especially for investors with access to top-tier funds, the ability to lock up capital, and tolerance for illiquidity. The return premium is real, but so are the risks and access barriers.
Public markets, on the other hand, offer reliable, lower-cost, and liquid investment options. For most investors, especially those without institutional-level access to elite private equity funds, a well-diversified public market portfolio is likely to provide strong long-term returns with greater transparency and control.

In summary, private equity may outperform public markets in specific circumstances, but public equities remain a robust and efficient vehicle for long-term wealth accumulation for the broader investing population.

Private Equity vs. Public Markets: Which Provides Better Long-Term Returns