Should You Own Private Equity? What the Data Says

Should you own private equity in your personal portfolio? I spent years in private equity and I work with private equity professionals every day, so people usually expect an easy yes from me. My honest answer is that it depends, and for a lot of people the answer is no.

This article covers traditional buyout funds: what you are buying, what the return data shows, what it costs, and a framework for deciding whether one belongs in your portfolio.

What you are buying when you invest in a buyout fund

A buyout fund raises committed capital, buys controlling stakes in private companies using a meaningful amount of debt, works to improve them, and sells them a few years later. You commit a dollar amount up front, but the money gets called over the first 3 to 5 years on the manager's schedule. Total fund life is usually 7 to 10 years and often longer.

Two things follow from that. You have to keep cash available for capital calls, which have a habit of arriving when markets are volatile. And your early statements will look bad, because fees start on day one while the value creation takes years. That pattern is called the J curve, and it is normal.

Most institutional quality funds require you to be a qualified purchaser, which means $5 million of investments. Individuals usually get in through a feeder fund or a platform that pools smaller investors, and that adds a layer of fees on top of the fund's own.

Does private equity beat the stock market?

Cambridge Associates tracks a broad universe of US private equity funds. As of September 2025, the 10 year return net of fees was right around 15% a year. That is the number in the pitchbooks. What matters is what you compare it to.

• Against the Russell 2000 (small company stocks), private equity added about 4.5 percentage points a year over 10 years.
• Against the Russell 3000 (the broad US market), the same funds added about 1 percentage point a year. Over 5 years the advantage was close to zero.

It is the same data and the same funds. Only the benchmark changed. State Street's index of more than 4,000 funds recently showed US buyout trailing the S&P 500 at the 1, 3, 5, and 10 year marks. A real part of that gap is the run in the largest technology stocks, and over 20 years the record still favors private equity. Both things are true.

The average return is not the return you get

In public markets the gap between managers is small. In private markets it is wide. Top quartile buyout funds have historically returned about 2.5 times your money, while bottom quartile funds returned closer to 1.2 times.

The natural response is to pick a good manager. The research makes that harder than it sounds. A study of nearly 900 buyout funds by Harris, Jenkinson, Kaplan, and Stucke found that after 2000, only about 24% of funds that followed a top quartile fund landed in the top quartile again. Random chance would be 25%.

So I think you should plan on getting something close to the average, before paying anything extra for access.

Why private equity looks less risky than it is

Reported private equity returns show volatility of about 9% a year, compared with roughly 19% for the S&P 500 over the long run. On paper that looks like stock returns with half the risk.

The catch is that private companies are valued once a quarter, largely by the people who own them. Those values move smoothly by construction. When researchers correct for that smoothing, private equity volatility comes out closer to 15% or 16%, which is roughly the same risk as stocks. Not seeing a daily price does have a behavioral benefit, since it is hard to panic sell. That is a different thing from lower risk.

Liquidity, fees, and taxes

• Liquidity. According to Bain, funds distributed cash equal to about 14% of net asset value in 2025, the fourth straight year below 15%. The median holding period reached 7 years. You can sell on the secondary market, where diversified buyout stakes recently sold at roughly 92 cents on the dollar.
• Fees. The standard structure is a 2% management fee plus 20% of profits above a hurdle. CalSTRS reported that its private equity program cost about 3.8% of assets in a single year, compared with about 0.2% for its public stock program.
• Taxes. These funds report on a K1, which often arrives in September, so expect to extend your return. Holding a buyout fund inside an IRA can also create a tax bill inside the IRA, because income tied to the fund's debt can be taxable to the account.

Who should own private equity, and who should pass

A buyout fund can make sense when four things are true:

1. You do not already have the same risk through your job or business.
2. The money is truly long term and you can meet capital calls in a bad year.
3. You have real access, meaning institutional quality funds or an employee vehicle.
4. The placement makes sense after tax.

It usually does not make sense if you will need the money within 10 years, if your only access is a feeder with stacked fees, if you plan to hold it in an IRA, or if the main appeal is a smooth line on your statement.

If you work in private equity

Your salary, bonus, carry, coinvestment, and commitment to your own fund are all tied to the same asset class and the same exit market. When exits slow, all of them move against you at once. An outside buyout fund adds to the concentration you already have. For most of the private equity professionals I work with, the right personal portfolio looks boring on purpose.

One exception is employee coinvestment and firm sponsored vehicles, which often carry no management fee and no carried interest. That changes the math in your favor. It is still a bet on your own firm. I cover this kind of planning on our private equity professionals page.

Common questions

How much do you need to invest in private equity?

Most institutional quality funds require qualified purchaser status, which is $5 million of investments, and minimums have traditionally been in the millions. Feeder funds and platforms accept less but add their own fees.

Is private equity less volatile than stocks?

The reported numbers say yes, but much of that comes from infrequent pricing. Adjusted for smoothing, the risk looks similar to public stocks.

Can I hold a private equity fund in an IRA?

You can, but buyout funds use debt, and income tied to that debt can be taxed inside the IRA at trust rates. Talk with your CPA before doing it.

VDB Wealth is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

Over the last ten years, private equity funds returned about fifteen percent a year after fees. That is the number in every pitchbook you will ever see. Here is what those pitchbooks do not tell you. Depending on which stock index you compare it to, the same funds over the same decade either crushed the market or added almost nothing. Same data, two completely different stories, and the only thing that changed was the benchmark.

I spent years in private equity, and I work with private equity professionals every day. So when someone asks whether they should own a buyout fund personally, they usually expect an easy yes from me. The honest answer is that it depends, and for a lot of people the answer is no.

Quick introduction. I am Andy VandenBerg, founder of VDB Wealth, where I work with business owners, executives, and families who have genuinely complicated financial lives. Before starting the firm I worked in institutional trading, family office investing, and private equity, so I have sat on both sides of this table.

This video is about traditional buyout funds, where you commit capital, it gets called over time, and the fund sells companies years later.

Here is what we’ll cover. What you are buying and how individuals get access. The return data, and why the benchmark changes the answer. The volatility illusion. What illiquidity is costing. Fees and taxes. Then a framework for who should own this and who should walk away.

What you are actually buying, and how you get in

Let us define the thing, because private equity gets used as a catch all and it should not be.

A buyout fund raises committed capital, buys controlling stakes in private companies using a meaningful amount of debt, tries to improve those companies, and sells them a few years later. The mechanics matter more than people expect. You commit a dollar amount up front, but you do not send the money on day one. It gets called over the first three to five years as the manager finds deals, on the manager's schedule, not yours. Total fund life is usually seven to ten years, and in practice often longer.

Two things fall out of that. You have to keep money available to meet those calls, and calls have a habit of arriving when markets are volatile. And your early statements will look bad, because fees come out from day one while the value creation takes years. That is called the J curve, and it is normal.

Now, access. Most institutional quality funds require you to be a qualified purchaser, which means five million dollars of investments, with minimums traditionally in the millions. So individuals usually come in through a feeder fund or a platform that pools smaller investors into one commitment. That gets you in the door, and it adds a layer of fees on top of the fund's own fees.

So why is the industry suddenly interested in individual investors? Because roughly one point three trillion dollars of committed capital is sitting undeployed, and the traditional buyers, the pensions and endowments, are not getting money back fast enough to keep committing. Individual money is the growth market. That is not a reason to say no. But notice that you are being invited to a party right as the people who used to fill the room stepped back.

The returns question, and why the benchmark decides the answer

Now the question everyone cares about. Does private equity beat the stock market?

Cambridge Associates tracks a broad universe of United States private equity funds. As of September of last year, the ten year return, net of fees, was right around fifteen percent. That is the number I opened with. Now watch what happens when you compare it to public markets properly, using a method that accounts for the timing of cash flows.

Against the Russell 2000, which is small company stocks, private equity added about four and a half percentage points a year over ten years. That is the comparison in the marketing material, and it is defensible, because buyout funds do buy smaller companies.

Against the Russell 3000, the broad United States market, the same funds over the same ten years added about one percentage point a year. Over five years, the advantage was essentially zero.

Same data. Same funds. The only thing that changed was the benchmark.

It gets sharper. State Street runs an index covering more than four thousand funds. In their analysis published this month, United States buyout came in below public market parity against the S and P 500 at the one, three, five, and ten year marks, the first time since their index began in the year 2000. Here is the fair caveat, and it matters. Against the S and P 500 excluding the largest handful of technology names, buyout was still ahead over five to ten years. So a real part of that gap is the run in mega cap tech, not private equity falling apart.

In fairness, plenty of serious firms argue that against global indexes private equity still wins clearly, and the twenty year record does favor it. Both things are true at once.

The average is not what you get

Here is the part that usually gets skipped, and it may be the most important thing in this video.

Everything I just described is an average. In public markets, the average is roughly what you get, because the gap between managers is small. Over twenty years, the spread between a top quartile and a bottom quartile United States small company growth fund was about one percentage point a year. Picking the wrong one is an annoyance, not a disaster.

In private markets that gap explodes. In venture capital, the same spread has run between eighteen and twenty two percentage points a year. Buyout is not that extreme, but top quartile buyout funds have historically returned about two and a half times your money while bottom quartile funds returned closer to one point two times. Same asset class, completely different outcomes.

So the obvious response is, fine, I will pick a good manager. That is where the research gets uncomfortable. Harris, Jenkinson, Kaplan and Stucke studied nearly nine hundred buyout funds, using only the information an investor could actually have known at the time a fund was raising. Before the year 2000, past performance predicted future performance. After 2000, it did not. Only about twenty four percent of funds following a top quartile fund landed in the top quartile again. Random would be twenty five percent.

Following the top quartile rule was, statistically, a coin flip.

So put those two facts together. Enormous dispersion, and no reliable way to pick winners in advance. Which means you should plan on getting the average. And the average over the last decade is that one percentage point, before you pay anything extra for access.

The volatility illusion

Next, the risk numbers, because this is where private equity looks like a free lunch and is not.

Take reported private equity returns and calculate volatility and you get about nine percent a year. The S and P 500 over the long run is closer to nineteen. So on paper it looks like equity returns with half the risk, and any portfolio model you feed that into will tell you to buy as much as you can.

Here is the problem. Public stocks are priced every second by strangers with money on the line. Private companies are valued once a quarter, largely by the people who own them, using models. Those valuations move smoothly by construction. Researchers can measure that smoothing, and when they correct for it, private equity volatility comes out closer to fifteen or sixteen percent. Not half the risk of stocks. Roughly the same risk as stocks.

Cliff Asness has a name for this. He calls it volatility laundering. Illiquidity used to be a drawback you demanded compensation for. Now it gets sold as a feature, because it hides the price.

The honest counterpoint is that not seeing the price has a real behavioral benefit. Investors who cannot look at a daily quote do not panic sell at the bottom, and that saves real money. Just be clear that you are buying the inability to react, which is not the same thing as lower risk.

The liquidity bill

Now the part that has stopped being theoretical, because the last four years have been a real stress test.

The bargain in private equity is that you give up access to your money and get paid for it. The fair question is, how much access, and for how long.

According to Bain's report this year, private equity funds distributed cash equal to about fourteen percent of their net asset value last year, the fourth consecutive year below fifteen percent. The only comparable stretch in the modern history of the asset class was the financial crisis. Meanwhile, roughly thirty two thousand companies are sitting in private equity portfolios waiting to be sold, worth about three point eight trillion dollars. At the current pace of exits, that is close to seven years of supply. And the median holding period reached seven years, up from the five to six that was normal in the twenty tens.

In plain English, money committed in 2019 is, for a lot of investors, still not fully back. That cuts two ways. Your money is out longer than the pitch implied, and if the fund is still calling capital while nothing comes back, you need liquidity elsewhere to fund those calls.

There is an escape hatch. You can sell your position to another investor in the secondary market, which traded a record two hundred and forty billion dollars last year, so it is real and functioning. Diversified buyout stakes sold at roughly ninety two cents on the dollar of stated value. So yes, you can get out early. You get out at a discount, and that discount tells you what other professionals think the marks are worth.

And a growing share of exits now happen when a manager sells a company out of one of its own funds into another fund it also runs. There are legitimate reasons to do that. It is also, plainly, the buyer and the seller being the same firm. If you see one in a fund you own, ask questions.

Fees, and the tax bill nobody mentions

Now cost, because this is where that one percentage point of edge goes to die.

The standard structure is a management fee of two percent a year, plus twenty percent of profits above a hurdle. That sounds contained. Here is what it actually costs, from a buyer that has to disclose it publicly. CalSTRS, the California teachers pension, reported that its private equity program cost about three point eight percent of assets in a single year, including one point seven points of carried interest. Their public stock program cost about zero point two percent. Roughly twenty times the cost, from an institution with dedicated staff and enormous negotiating leverage. You are not getting better terms than CalSTRS.

As an individual, you usually have that feeder or platform layer on top, charging its own fee for aggregating you into the fund. Sometimes that is disclosed cleanly. Often it is buried. If you cannot find the total cost in the documents, you should ask.

Then taxes, which almost never come up in the sales conversation. These funds report on a K1, and K1s are routinely late. It is normal to receive yours in September, which means you extend your personal return, potentially every year for a decade. They can also create tax filings in states where the portfolio companies operate.

And be careful about holding a buyout fund inside an IRA. When a fund uses debt, and buyout funds always use debt, the income attributable to that debt can become taxable to your IRA, at trust rates that reach thirty seven percent at a very low level of income, paid out of your retirement account. You can get a tax bill inside your IRA, on an investment you never sold and took nothing out of.

So is there a free lunch here? No. There is a return, there is a price, and the price shows up in fees, in liquidity, and in paperwork.

So should you own it? The framework

So here is how I actually work through this with clients, and it genuinely depends on the whole picture.

A buyout fund can make sense when four things are true. One, you do not already have exposure to the same risk through your job or your business. Two, the money is truly long term, after your liquidity and near term goals are funded, and you can meet capital calls in a bad year. Three, you have real access, meaning institutional quality funds or an employee vehicle, not simply the fund that happens to be raising and willing to take your check. Four, the placement makes sense after tax.

It usually does not make sense if you will need the money inside ten years, if your only access is a feeder with a stack of fees on top, if you are putting it inside an IRA, or if you like it because the line on the statement looks smooth. That last one is the most common reason people buy this, and the worst one.

Now the group I know best. If you work in private equity, be honest with yourself here. Your salary, your bonus, your carry, your co investment, and your commitment to your own fund are all levered bets on the same asset class and the same exit market. When exits slow, and they have slowed for four straight years, every one of those moves against you at once. Buying an outside buyout fund on top of that is not diversification. It is concentration in what you already own the most of. For most of the private equity professionals I work with, the right personal portfolio looks boring on purpose, because the exciting part of the balance sheet is already handled by the day job.

One exception. Employee co investment and firm sponsored vehicles often carry no management fee and no carried interest, which removes the biggest drag in this entire video. If you have access to that, the math changes meaningfully in your favor. Just do not confuse a fee free bet on your own firm with a diversified portfolio.

Call to action and close

Here is my honest summary. Private equity is a real asset class that has produced real returns, and over long horizons it has beaten public markets, especially against small companies. But the edge over the broad market in the last decade has been about a percentage point, the manager matters enormously and cannot be chosen reliably in advance, the low volatility is partly an illusion of infrequent pricing, distributions have been slow for four straight years, and the fees are roughly twenty times what public exposure costs. For the right person it earns a place.

If you are looking at a fund right now and want a second set of eyes before you commit, reach out. Leave a comment below or contact me directly through VDB Wealth. I read every message, and I am glad to help even if we never work together.

If this was useful, subscribe, because I break down decisions like this one in plain English every week. Thanks for watching, and I will see you in the next one.