Private equity funds are losing to the S&P 500 of late—why investments for the wealthy aren't necessarily better
Private equity has lagged the S&P 500 in the last few years despite longer-term outperformance.
Private Equity Funds Lag Behind S&P 500, Raising Questions About Their Value
The current market environment is prompting investors to reassess their choices, especially regarding private equity funds. These exclusive vehicles, generally limited to accredited investors with a net worth over $1 million (excluding a primary residence) or an annual income above $200,000, have been underperforming major public indexes.
Investment Performance Comparison
For the three‑year period ending in March, Cambridge Associates’ Private Equity Index—covering roughly 1,800 funds—delivered an annualized return of 7.4% after fees. Over five years, the same index posted a 9.3% gain. By comparison, a fund that tracks the S&P 500, a benchmark anyone can purchase at a fraction of a percent in fees, generated returns of 18.3% and 12% for the three‑ and five‑year spans respectively. The stark gap highlights concerns about the cost and exclusivity of private equity relative to broadly accessible public equities.
Potential Upside of Private Markets
Advocates of private investments point to two primary benefits. First, they argue that private equity can produce higher long‑term returns. Cambridge Associates reported that its private‑equity index achieved an annualized 12.8% return over the 25‑year period ending in 2025, versus a 10% return for the S&P 500. Second, private funds can employ leverage to acquire companies and gain entry to early‑stage opportunities before those businesses go public, offering the possibility of outsized upside alongside greater risk.
Expert Perspectives
Jon Baranko, chief investment officer at Allspring in Charlotte, North Carolina, notes that “private markets benefit from leverage to borrowing, illiquidity and having access to earlier stage investment opportunities.” Mitchell Caplan, chief executive of Willow Wealth in New York, stresses that a truly optimized portfolio should span both public and private markets, saying, “your portfolio was not optimized unless you ultimately had a truly diversified portfolio across both public and private [markets] and within public and private.”
Regulatory Shifts
In August 2025, President Donald Trump signed an executive order directing the Department of Labor and the Securities and Exchange Commission to broaden access to alternative assets, including private investments, within 401(k) plans. The Labor Department later proposed a rule—still pending finalization—that would make it easier for workplace retirement plans to incorporate private‑market assets. Industry observers viewed the moves as a win for retail investors. BlackRock chief executive Larry Fink, in his 2025 shareholder letter, argued that “democratizing” private markets would let everyday investors chase the same return potential that has traditionally been limited to the wealthy.
Risks and Due Diligence
Despite the potential upside, market professionals caution that private investments carry distinct risks and complexities. Prospective investors should scrutinize the drivers of returns and the inherent uncertainties before committing capital. Because private‑equity offerings vary widely, consulting a qualified financial adviser is advisable before making any portfolio adjustments. Ultimately, investors must weigh the advantages against the higher fees and limited liquidity to determine whether private equity aligns with their goals and risk tolerance.
Source: CNBC · 2026-09-02