The Decline of Private Equity and Debt Investments
Until recently, private investments such as private equity (PE) and private debt (PD) had delivered exceptionally strong returns, far outperforming their publicly traded counterparts. These assets were also perceived to offer relatively low volatility and low correlation to traditional stock and bond portfolios, making them attractive for diversification. However, this favorable landscape has changed dramatically, leading to a significant downturn in performance.
The Allure of Private Assets
What rational investor wouldn't want to load up on assets imbued with a trifecta of high returns, low volatility, and low correlation to stocks and bonds? As this alleged free lunch became increasingly accepted, it served as a lightning rod for investors, leading to a stampede of capital into private markets. Globally, PE assets under management grew from roughly US$1.5 trillion in 2010 to more than US$4 trillion by the end of 2024. The private debt market also expanded at a parabolic rate, with assets under management jumping from US$250 billion in 2010 to approximately US$1.4 trillion today.
Higher Returns? Don't Bet on It
It is perplexing how sophisticated endowments and pension funds could funnel trillions of dollars into PE and PD investments over just a few years without recognizing that their collective actions were fundamentally altering the market dynamics. You cannot change the inexorable forces of supply and demand. When a small amount of money finds a previously underexplored market replete with attractive investment opportunities, it is relatively easy to deliver excellent returns. However, when trillions of dollars chase the same strategy, it becomes increasingly difficult to maintain such performance. As famed investor Warren Buffett stated, "What the wise do in the beginning, fools do in the end."
As sure as the sun rises, the combination of too much money chasing too few opportunities has coincided with a deterioration in the performance of private versus public assets. According to Cambridge Associates, PE funds have delivered average annualized returns of 7.4 percent over the past three years ending June 30, 2025, compared with 19.7 percent for the S&P 500 index. Similarly, several large PD funds have faced significant write-downs and a spate of investor redemptions, which often cannot be honored due to a lack of liquidity.
Diversification Value: Always Was and Still Is a Myth
The notion that private assets are uncorrelated with their liquid, publicly traded counterparts is at best inaccurate and arguably utterly farcical. Private assets experience the same business cycles, competitive pressures, and market forces as their public counterparts. Until recently, PE firms on average took on 100 percent to 200 percent debt for every dollar of equity, compared with 50 percent for publicly listed companies. As such, their equity should be more volatile. And yet, PE funds have consistently managed to exhibit far lower volatility than most public equity portfolios, raising questions about the true nature of their risk profile.
In summary, the downfall of private equity and debt highlights a critical shift in investment landscapes. What once seemed like a surefire strategy for high returns and diversification has now revealed its vulnerabilities, underscoring the importance of cautious capital allocation in ever-evolving markets.
