Ask the Experts

Questions stirring our clients (and the financial markets)

We are always available to our customers for concerns and questions about their portfolios. As a representative of this, once a quarter we summarize the most frequently asked customer questions and the answers provided by our experts, thus giving you direct insights into our asset management and investment advisory services.

Private equity: Private equity strategies significantly outperformed public stock markets last year. Is that justified, or are valuations in the private equity asset class “artificial” and detached from reality?

Kaiser Partner Privatbank: While the MSCI World index ended 2022 down a good 18% for the year in the final reckoning, private equity strategies exhibited relative strength. Although their definitive performance figures for last year aren’t out yet and will first become available in the weeks ahead, preliminary indications (taken, for example, from the annual reports of publicly traded private equity firms) give reason to expect that the broad private equity sector closed out 2022 with a low-single-digit percent loss for the year. Some sub-strategies posted significantly stronger (secondaries) or weaker (venture capital) performances, but on the whole the private equity asset class outperformed public markets by a wide margin. A look at the fundamentals verifies that this outperformance is solidly underpinned. Privately held companies grow much faster than publicly traded corporations in the long run. Their revenue-growth advantage has averaged out to approximately 4 percentage points per annum over the last

20 years. Another factor is operational improvements, which generally lead to a (substantial) boosting of profit margins. Even amid the especially tough climate that prevailed in 2022, companies owned by private equity firms achieved a better business performance on aggregate than publicly traded corporations did. According to data from Hamilton Lane, their revenue grew by 11% year-on-year for the first three quarters of 2022 (compared to 8% for publicly traded companies) and their EBITDA increased by 6% (3%). The disproportionately large drawdowns on public stock markets have now reduced their overvaluation relative to private equity and has brought valuations on public and private markets more in line with each other. Privately held companies are more expensively valued, though, only in rare cases. The most compelling proof that the valuations and the superior performance figures don’t owe to window dressing by private equity managers comes from the deal and exit prices actually realized. Even in the challenging year 2022, private equity funds were generally able to sell their portfolio companies at prices above their book value as of the last prior valuation date. The exit premium on average amounted to more than 20% above the valuation four quarters prior to the sale. This confirms that private equity managers tend to value their portfolios conservatively and that the valuations relatively closely reflect reality.

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