Is Private Equity Still Worth It? What the Data Actually Shows in 2026
Private equity has a reputation problem and a track record that complicates it. Depending on who is talking, it is either the engine that rebuilds underperforming businesses or a machine for loading them with debt. The academic evidence is more interesting than either caricature, and it rewards a closer look than either side usually gives it.
How Private Equity Funds Actually Work
A private equity firm raises a fund from institutional investors: pension funds, endowments, insurers, and family offices, and uses it to buy controlling stakes in private companies, or to take public companies private. It holds each business for roughly three to seven years, works to make it substantially more valuable, sells it, and returns the proceeds.
That is the model. The complexity lives in the middle step.
Do Private Equity Funds Actually Outperform the Stock Market?
The most credible research on returns comes from studying fund level cash flows rather than self reported numbers. Harris, Jenkinson, and Kaplan analysed nearly 1,400 US funds and found that buyout performance had exceeded public markets by roughly 20 to 27% over a fund's life, or more than 3% annually. It is worth flagging that this is a full sample average across a long historical period, not a top quartile figure, but it is also a backward looking one, and the same paper is the source of the caveat below. Multiple independent studies using different datasets reached broadly similar conclusions about the historical buyout premium.
Two honest caveats belong right next to that. First, the same authors found that for vintages after 2005, buyout returns have been roughly equal to public markets, meaning the historical edge narrowed considerably as the industry grew and more capital chased the same opportunities. Second, venture capital's record is far more variable, strong in the 1990s and weaker in the 2000s. "Private equity outperforms" is too blunt a statement to be useful on its own. Which funds, which vintage year, and which quartile all matter enormously, and an investor who only sees the headline number is not seeing the distribution behind it.
Why Private Equity Ownership Is Different From Owning Public Stock
The unusual thing about private equity is not the buying and selling, it is the ownership in between. A public company CEO reports to thousands of anonymous shareholders and faces the market's verdict every quarter. A PE owned CEO reports to a small board that owns the company outright and works to a multi year plan.
That alignment is the point, and it shows up in the underlying businesses, not just the returns. Research on a large sample of US buyouts from the 1980s through the early 2000s found significant increases in productivity at acquired companies. But this finding is not universal. A more recent review of the evidence notes that other academic work examining tax returns and financial statements of portfolio companies found little evidence of operating improvement in a meaningful share of leveraged buyouts from the 1990s and 2000s, and that the effect appears to have weakened further in deals done at today's higher entry prices. Concentrated ownership and a long horizon make operational improvement possible. They do not guarantee it happens in every deal, and the added leverage that typically accompanies a buyout raises the cost of getting it wrong.
Why Private Equity Now Covers So Much of the Real Economy
This model has moved from the margins to the centre. As US public listings fell roughly 40 to 50% from their 1996 peak, the number of PE backed US companies grew from about 1,900 to 11,200. For an institution allocating capital, avoiding private equity increasingly means avoiding a large part of the real economy, not just a niche asset class.
Private Equity Returns in 2026: Why the Easy Gains Are Gone
For most of the 2010s, structural tailwinds did much of the work. In a typical 2015 buyout, roughly half the purchase price was borrowed at 6 to 7%, and asset prices were climbing, so a deal needed only about 5% annual EBITDA growth to hit a 2.5x return over five years. Today, borrowing costs sit at 8 to 9%, leverage is down to 30 to 40%, and purchase multiples are high but flat, so the same deal now needs 10 to 12% annual earnings growth. Bain calls this "12 is the new 5," and it is a useful shorthand for the shift. Cheap debt and rising valuations did much of the work for a decade. That tailwind is gone, and what is left is the harder part: making companies genuinely better.
The evidence on which lever matters most going forward is mixed rather than settled. An industry analysis of nearly 3,000 fully exited deals found that operational improvement, meaning revenue growth and margin expansion, contributed to returns more consistently over time than leverage or multiple expansion. That is a plausible reading of the recent data, but it comes from an alternative asset platform with a commercial interest in the asset class, and the academic literature above complicates the clean version of that story, since not every buyout in the historical record shows the operating gains the narrative assumes. Financial engineering flattered returns when interest rates cooperated. Operating skill is the part that is supposed to work in more weathers, but it is also the part that is hardest to verify from the outside, and regulators have flagged that nonbank vehicles including private funds often provide limited disclosure of their assets, leverage, and liquidity, which makes it harder for outsiders to assess where the risk actually sits.
What Institutional Investors Are Actually Paying For
Institutions allocate to private equity for three reasons: access to businesses that will never list publicly, the illiquidity premium available to anyone who can genuinely commit capital for a decade, and returns that, at the top end of the manager distribution, have meaningfully beaten public equities. That last point deserves its own caveat: top end returns are, by definition, not what the average fund delivers, and the dispersion between managers is the subject of the next section.
It is worth being clear eyed about the "low volatility" pitch specifically. Asness argues that private equity's smooth reported returns understate its true risk, since illiquid assets are not marked to market daily the way public equities are. He may be right that the appearance of stability is partly an accounting artefact rather than an economic reality. That does not invalidate the asset class, but it does mean that anyone allocating on the basis of "low volatility" alone is measuring the wrong thing.
The shape of the ride matters too. Returns typically arrive as a J curve: fees and early costs make the numbers look negative for the first several years before exits deliver the gains. An investor who cannot sit through that dip, financially or psychologically, is not well suited to the asset class regardless of the long run numbers.
Further reading: Private Markets vs. Public Markets: What Allocators Need to Know
Where This Leaves Real, Productive Assets More Broadly
The tightening described above is specific to a financing model, not a permanent statement about private investing as a whole. Not every private asset class has relied on borrowed money and rising valuations to generate its return.
Real assets, productive farmland, physical commodities, infrastructure, are a useful contrast, because in these areas the return has generally come from something harder to fake: cash yield, biological or physical output, and long run appreciation, rather than an added layer of debt or the hope of selling at a richer multiple than the purchase price. There is comparatively little to financially engineer in a field of row crops or a cargo of physically hedged commodities, so the return story in these areas never depended on the cheap debt cycle the way a leveraged buyout did.
That distinction shows up in correlation as well as in construction. Real asset returns have historically moved more independently of equity and credit markets, since the drivers are physical or agronomic, rainfall, harvests, food demand, supply and storage dynamics, rather than financial, rates, credit spreads, and sentiment. A portfolio built around genuinely productive assets is not exposed to the same rising rate headwind that just pushed leveraged buyouts from needing roughly 5% annual earnings growth to needing 10 to 12%, because the return was never built on cheap leverage in the first place.
None of this makes real assets a substitute for private equity, or for each other. They behave differently across categories, sit in different parts of a portfolio, and carry their own risks, illiquidity, concentration, and weather, storage, or commodity cycles chief among them, and it is worth noting that even a long duration, historically stable category like farmland posted its first negative annual return on record in 2024, a reminder that low correlation does not mean risk free. But the underlying question is a useful lens for the one this article keeps circling back to: the more an asset's return depends on genuine, hard to fake productive value, income, growth, and output, rather than financial structuring, the more durable that return tends to be across different rate and credit environments.
Further reading: Productive Farmland as a Diversifying Real Asset
Why Manager Selection Matters More Than the Asset Class
The critical caveat, and arguably the most important sentence in this whole piece, is dispersion. The gap between the best and worst private equity managers dwarfs anything seen in public markets, and unlike public equities there is no low cost index fund to fall back on if manager selection goes wrong. Bain has noted that investors are increasingly narrowing their focus to firms that are repeatable generators of alpha, which is a rational response to a market where the average result is unremarkable and the top result is exceptional. It also means that headline industry return figures, including the outperformance numbers cited earlier in this piece, describe an average across a wide spread of outcomes, and an investor who ends up in a bottom quartile fund can underperform public markets substantially even in a period when the asset class as a whole looks strong.
For a family office without a large internal diligence team, that dispersion problem translates into a few concrete questions worth asking before committing to any fund, rather than after. Does the manager's track record hold up across more than one fund and more than one vintage, or is the pitch built on a single strong cycle that may not repeat. How much of the historical return in that track record came from leverage and multiple expansion versus the kind of operational improvement discussed above, and does that mix still make sense given where borrowing costs and entry multiples sit today. What does the fee structure actually cost across the full ten year life of the commitment, not just the headline carry. And does the manager offer any visibility into deal level performance during the holding period, rather than only at exit, given how much can go uncorrected in a J curve before it shows up in reported numbers. None of these questions guarantee a good outcome, but skipping them is closer to buying the index without being able to buy the index.
The Takeaway
Private equity is best understood not as an asset class but as an ownership model: concentrated control, long horizons, and hands on involvement, financed with more leverage than a typical public company would carry. In an era where debt is expensive and valuations offer no free lift, returns increasingly belong to firms that can genuinely build companies rather than firms that simply bought them at the right moment in a cheap debt cycle. The historical data support the model. They do not support assuming any given fund will replicate it, and the dispersion between managers means the choice of manager likely matters more than the choice to allocate to the asset class at all.
The same test, does the return come from something genuinely productive, or from financing conditions that happen to be favourable, is worth applying across a portfolio, not just within private equity. It is also why real, productive assets outside the buyout model are worth understanding on their own terms rather than treating private equity as the default entry point into private markets.
Frequently Asked Questions
Is private equity a good investment in 2026? It depends heavily on which fund and which vintage year, not just on the asset class as a whole. Historical data show a genuine buyout premium over public markets, but that premium has narrowed for post-2005 vintages, and today's higher borrowing costs mean funds need faster underlying earnings growth to hit the same returns that cheap debt used to deliver.
How do private equity funds make money? A fund buys controlling stakes in private companies, or takes public companies private, using a mix of investor capital and borrowed money. It typically holds each business for three to seven years, works to grow revenue and expand margins, then sells the company or takes it public and returns the proceeds to investors, minus fees.
Does private equity really outperform the stock market? On average and over the long historical record, yes, by a meaningful margin. But that average masks wide dispersion between managers, and more recent vintages have shown a much smaller edge over public equities than the earlier decades of the industry.
What is the biggest risk in private equity investing? Illiquidity and manager selection. Capital is typically locked up for a decade, returns arrive as a J curve that looks negative in the early years, and the gap between top and bottom quartile managers is far wider than anything seen in public markets, with no index fund to fall back on if the chosen manager underperforms.
Disclaimer: This article is for general informational purposes only and does not constitute investment, legal, or tax advice, nor a recommendation to buy, sell, or hold any security or asset. Past performance, including the historical return data cited above, is not indicative of future results. Private equity investments are illiquid, carry the risk of substantial or total loss, and are not suitable for all investors. You should consult your own financial, legal, and tax advisors before making any investment decision.
If you are weighing a private equity commitment against real asset alternatives, or want a second set of eyes on manager selection and fee structure before you commit, talk to our team about how the comparison looks for your portfolio specifically.