Oxford professor argues private equity’s claims of outperformance rest on fragile foundations, from distorted benchmarks and opaque fee structures to the illusion of an illiquidity premium.
Ludovic Phalippou is professor of finance at Saïd Business School, University of Oxford, and one of the most prominent academic critics of private equity’s performance narrative. His research – widely cited by regulators and institutional investors – has challenged conventional wisdom on fees, benchmarking, risk-adjusted returns and the purported illiquidity premium, most notably in his book Private Equity Laid Bare. He recently started a Substack based on his research.
In this interview, Phalippou dissects why the private equity model remains resilient despite academic scepticism. He argues that incomplete datasets, benchmarking choices and opaque fee structures distort reported performance, explains why fee compression has failed to materialise, and suggests the push to bring private markets into defined contribution (DC) pension schemes demands stricter safeguards. He also assesses diversification claims, systemic risk and potential reforms.
To what extent do fees, leverage, selection effects and incomplete datasets obscure whether private equity consistently outperforms?
Ludovic Phalippou: Performance is typically reported net of fund-level fees, but this does not capture the full cost structure borne by end investors. Fees related to currency hedging, fund-of-funds layering, consultants and other intermediaries are generally ignored. While assumed small, they remain unquantified and cumulatively may be non-trivial – particularly for smaller investors.
Leverage only plays a role when the question shifts to risk-adjusted returns. On this, the academic literature is remarkably consistent. Virtually all rigorous studies applying risk adjustment – including those using standard asset pricing models – find that the average private equity fund delivers negative alpha. But measuring risk is very difficult, of course, so the conclusion needs to be taken with a grain of salt.
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Selection effects have long been assumed to be small. Recent work by Alon Brav and others suggests the problem may be more severe than previously thought. Standard commercial databases systematically miss certain types of underperforming funds, introducing an upward bias in reported performance. The issue may not be catastrophic, but it’s certainly real.
Benchmarking choices distort the picture most. Private equity is often compared to public indices that include sectors PE funds exclude – utilities, real estate and so on – which naturally inflates the relative performance of the asset class.
Is the performance debate settled in the academic literature?
Phalippou: The short answer is yes – and no. There is broad consensus on the raw numbers – most private equity funds have delivered annual returns of around 12% over the past two decades. In the US this basically matches the stock market, although some people manage to strategically choose benchmarks, and definitions of PE, so it shows PE has been better.
The situation is different in Europe – PE returns are also 12% but stock returns are much lower – but this likely reflects differences in sector composition rather than fundamental outperformance.
As shown in [my recent academic paper] Apples and Oranges, when consistent definitions and benchmarks are applied, most of the headline outperformance disappears.
Some argue excess returns are possible in capacity-constrained niches due to illiquidity premiums. Is that often the case, or has scale overwhelmed most of them?
Phalippou: This idea of an ‘illiquidity premium’ in private equity is a classic example of clever storytelling. It’s certainly true that in markets like real estate or fixed income, one can observe a tangible illiquidity premium. Buy a house in the countryside, and you’ll see fewer transactions and higher yields compared to central London. Same for corporate bonds – the less liquid the paper, the higher the yield.
But private equity doesn’t work that way. Funds buy and sell companies in broadly competitive markets. The fact that a PE fund is illiquid to its investor doesn’t make a premium appear magically. Put stocks into a PE fund and you will get the return of the stocks minus the fees. No illiquidity premium just appears.
Which fee practices concern you most from an LP alignment perspective?
Phalippou: Two areas are particularly problematic. First, there is ex-post discretion on what fees and expenses are taken at the asset level. These include monitoring fees, transaction fees and consulting fees extracted from portfolio companies, but also more exotic things.
Second, many operational expenses – from travel to compliance to advisory costs – are increasingly charged to the fund rather than the GP. This further shifts the economic burden to investors without clear accountability.
Would improving transparency standards materially change LPs’ capital allocation decisions? What single disclosure change would most improve decision-making?
Phalippou: In principle, yes – greater transparency should drive better decisions. But in practice, behavioural inertia, internal politics and career risk within institutional investors often prevent meaningful action. Many LPs don’t act on what they learn. Others are constrained by consultants or governance frameworks that are themselves opaque or conflicted.
If one change could be made, it would be the standardization of key definitions. ‘Carry’ should mean one thing, not three. ‘Committed capital’ should be defined uniformly. Multiples should be calculated the same way across funds. And IRR should be banned from marketing materials entirely.
Why haven’t we seen meaningful fee compression despite a growing investor base?
Phalippou: Because competition relies on transparency – and in private equity, most investors don’t know what they’re paying. Fees are sliced across multiple layers – management fees, carried interest, fund-level costs, portfolio-level fees, broken deal costs and more. Without clear visibility into total cost, how can LPs exert market pressure? Hence, even as capital floods in and fund sizes grow, the invisible hand of the market remains largely paralysed.
How should DC pension trustees in the UK respond to the Mansion House Accord push toward private markets?
Phalippou: The democratization of private equity – particularly through DC pensions – demands a far higher standard of care. As discussed in Private Markets for the People?, giving retail investors exposure to an opaque, high-fee, legally complex asset class is not empowerment – it’s risk transfer.
DC trustees should insist on three things. First, clear disclosure of total costs, including portfolio-level fees. Second, robust governance and independent valuation processes – especially given the NAV-based pricing used in semi-liquid products. Third, parity of regulation – if mutual funds face thousands of pages of rules, it makes no sense for private equity products to operate under much laxer oversight just because they have fewer retail investors.
Does adding private markets to a public markets portfolio necessarily improve diversification?
Not necessarily. Diversification depends on strategy, and region. US-based buyout funds, for instance, are often exposed to the same macroeconomic drivers as US public equities. In such cases, the diversification benefit may be limited or even illusory.
However, some segments – such as early-stage venture capital or non-US private equity – should offer meaningful diversification. But this must be tested, not assumed. And diversification is only beneficial if it’s not overwhelmed by increased fees and illiquidity.
Has the rise of private markets post-GFC increased systemic risk?
In some ways, yes – though the evidence does not suggest a dramatic shift in systemic vulnerability. Leveraged buyouts, by design, increase the financial fragility of portfolio companies. But PE firms often facilitate fast restructurings and avoid the drawn-out bankruptcies seen in public companies.
The broader concern lies in the opacity of private markets. A growing share of the global financial system now resides in a shadow sector with limited transparency, uncertain pricing and weak regulatory oversight. As highlighted in my FCA report, this undermines both investor protection and macroprudential monitoring. Financial stability is not just about leverage – it’s also about knowing where the risks reside.