Buyout Performance with Assets Valued at Market

Private equity has become a core allocation for many pension funds, endowments, and other institutional investors. One of its attractions is the belief that buyout funds can generate returns above public equities while exhibiting relatively modest volatility and providing diversification benefits. But measuring private equity risk is unusually difficult. Unlike publicly traded stocks, private equity investments are not continuously marked to market. Their reported Net Asset Values (NAVs) are determined periodically by fund sponsors, potentially smoothing the observed return series. If measured volatility and market beta are artificially low, estimates of alpha may consequently be too high. The authors approach this longstanding problem from a different direction. Instead of trying to infer private equity risk from fund cash flows or reported NAVs, they examine portfolios of buyout fund interests that actually trade on European stock exchanges. This allows them to compare market prices and reported NAVs for essentially the same underlying private equity assets.

Buyout Performance with Assets Valued at Market

• Ennis and Rasmussen
• Working Paper, 2026
• A version of this paper can be found here
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Key Academic Insights

Market Prices Reveal Much More Private Equity Risk Than NAVs
The paper’s most striking result may be the difference between risk measured using reported NAVs and risk measured using actual market prices. Over the 20 years ending June 2025, annualized volatility for listed private equity was approximately 29% when measured using market prices, compared with 19% using NAVs. Global public equities, by comparison, exhibited volatility of approximately 16%. In other words, the same underlying private equity assets look dramatically riskier when investors, rather than fund sponsors, determine their value. The difference becomes even clearer during periods of market stress. During the year ending June 2009, MSCI ACWI declined 29%. Listed private equity NAVs fell 46%, but the market value of those private equity interests declined 69%. The apparently smoother behavior of private equity therefore depends substantially on how the assets are valued.

Private Equity May Be Much More Equity-Like Than Investors Assume
Private equity is frequently classified as an “alternative” allocation, partly because its reported returns appear to behave differently from public stocks. Market pricing tells a different story. Listed private equity exhibits a 0.94 correlation with global equities when measured using market prices, compared with 0.81 using NAVs. The CAPM results reinforce this point. Over the authors’ 20-year sample, listed private equity has an estimated beta of approximately 1.5 relative to the MSCI World Index, while the regression explains 88% of the variation in returns. Rather than behaving like an alternative asset with limited equity exposure, market-priced buyouts behave much like a highly levered form of public equity.

The Measurement Horizon Can Dramatically Change Estimated Private Equity Risk
One of the paper’s more interesting methodological findings is how strongly estimated beta depends on the return interval used. Using daily returns produces a beta of only 0.40. Monthly returns increase it to 0.93, quarterly returns to 1.28, annual returns to 1.47, and biennial returns to 1.55. At the same time, the regression’s R² increases from only 22% using daily data to 91% using annual observations and 96% using biennial observations.

Once Risk Is Marked to Market, There Is Little Evidence of Private Equity Alpha
This is the paper’s central investment result. The authors estimate a CAPM beta of approximately 1.5 and annualized alpha of –4.2%. Importantly, however, that negative alpha is not statistically significant. The appropriate conclusion is therefore not that private equity necessarily destroys value, but that the data provide no statistically meaningful evidence of positive alpha once risk is measured using market prices. The finding is also persistent. Rolling 10-year regressions generate betas between approximately 1.5 and 1.9, and none of the windows produces positive alpha; the intercepts are consistently negative and generally statistically indistinguishable from zero. A three-factor model incorporating size and value exposure produces a similar conclusion: beta remains approximately 1.5 and estimated alpha is -3.0%, again statistically insignificant.

Market-Based Evidence Helps Explain the Private Equity “Beta Puzzle”
The findings offer a potential explanation for a longstanding puzzle. Some studies using cash flows and NAVs estimate private equity beta at or below 1.0, despite the considerable leverage employed in leveraged buyouts. From basic financial theory, greater leverage should increase the risk borne by equity investors. The authors argue that market-based evidence is much more consistent with this intuition. Importantly, the results are not unique to listed private equity. Studies using secondary-market transactions estimate buyout volatility of roughly 30%–40%, betas between 1.8 and 2.1, and no statistically significant alpha. The convergence between listed-market and secondary-market evidence strengthens the argument that traditional NAV-based measures may materially understate the economic risk of buyout investing.

Practical Applications for Investment Advisors

Reconsider How Private Equity Risk Is Entered Into Asset Allocation Models

Advisors should be cautious about inserting reported private equity volatility directly into strategic asset allocation models. If NAV smoothing materially suppresses measured volatility, an optimizer may interpret private equity as providing an unusually attractive combination of high returns and low risk. The paper suggests that the true economic volatility of buyout equity may instead be considerably higher.

Be Careful About the Diversification Benefit Assigned to Private Equity
Private equity may diversify portfolios less than conventional return data suggest. A market-price correlation of 0.94 with global equities implies that much of the apparent diversification observed in NAV data may reflect differences in valuation frequency rather than genuinely independent economic exposure. For advisors, this distinction matters. Accounting diversification is not necessarily economic diversification. Assets that appear uncorrelated because one is repriced daily and another quarterly may still be exposed to many of the same underlying risk factors.

Benchmark Private Equity Against Its Economic Risk
Private equity performance should not be judged simply by whether it outperforms a public equity index. If buyout equity has a beta closer to 1.5 than 1.0, it should be expected to earn a higher return than ordinary equities as compensation for bearing greater systematic risk. The relevant question is therefore not simply, “Did private equity beat public equities?” It is, “Did private equity outperform sufficiently to compensate investors for its leverage, systematic risk, illiquidity, fees, and complexity?” The paper’s results suggest that this is a considerably more demanding benchmark.

Distinguish Smooth Returns From Low Risk
Perhaps the most practical lesson is that a smooth reported return series should never automatically be interpreted as evidence of low economic risk. Private assets can appear stable precisely because their valuations adjust slowly. For long-horizon investors, the absence of daily price movements may provide behavioral benefits, but it does not eliminate the underlying economic volatility of the assets. Advisors should distinguish between observed volatility, valuation volatility, and actual economic risk when explaining private investments to clients.

How to Explain This to Clients

“Private equity often looks less volatile than the stock market because private companies are not repriced every day. This paper looks at private equity portfolios that actually trade on stock exchanges, allowing us to see what investors are willing to pay for them in real time. Once the assets are measured this way, they look much riskier and much more closely connected to the stock market than traditional private equity valuations suggest. The study doesn’t show that private equity is a bad investment. It shows that some of its apparent superior risk-adjusted performance may come from how its risk is measured rather than from true investment alpha.”

The Most Important Chart from the Paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

Abstract

From Ennis and Rasmussen (2026):

The debate over whether buyout investments generate positive alpha hinges on proper risk measurement. We study buyout volatility, valuation, and performance through the lens of public-market pricing of private equity interests on European stock exchanges. We report that the volatility and stock market correlation of listed private equity (LPE) returns are greater than when determined using cash flows and net asset values (NAVs). We estimate a beta of roughly 1.5 and find no statistically meaningful alpha. Using market-priced buyout vehicles eliminates the appearance of alpha generated by smoothed NAVs and implies standard equity-like compensation for higher leverage. These results align with those of studies based on secondary market transactions

was originally published at Alpha Architect. Please read the Alpha Architect disclosures at your convenience.