PE Has Outperformed Stocks for Decades — And Especially During High Inflation

From 1981 to 2021, PE funds delivered an excess annual return of 6 percent during periods of high inflation, according to KKR.

Bloomberg/ Alex Kraus

Bloomberg/ Alex Kraus

Private equity may be a quiet inflation fighter.

While it’s not surprising that one of the largest private equity firms would argue for PE, the thesis is based on more than three decades of public data. According to KKR’s latest insight piece, PE funds have outperformed the stock market in almost all environments over the past three decades. From 1981 to 2021, these funds delivered an excess annual return of 4.3 percent relative to public equities. They generated even higher returns during periods of high inflation, with an excess annual return of 6 percent.

The latest KKR paper is the third in a series of reports that discuss the role of alternative investments in portfolio construction. In the previous two papers, which focused on real assets and private credit, KKR suggested that investors adopt a 40/30/30 portfolio, with 40 percent in public equities, 30 percent in fixed income, and 30 percent in alternative investments. The allocation to alternatives would be distributed equally between private credit, real estate, and infrastructure.

In its latest paper, KKR introduced private equity into the discussion. Instead of a 40 percent allocation to stocks, the firm argues institutional investors can invest 25 percent in listed stocks and 15 percent in private equity. Using this method, alternatives would then make up a total of 45 percent of an investor’s portfolio.

For those who place a higher premium on liquidity, especially individual investors, KKR suggests dividing the 30 percent alternatives allocation in the original 40/30/30 portfolio into four segments: 10 percent to private equity, 10 percent to private credit, 5 percent to real estate, and 5 percent to infrastructure.

Either way, KKR says that investors should make alternatives an important part of their portfolios, because the traditional 60/40 stock and bond portfolio is becoming less attractive in the current environment. “Unless you think we’re going back to an environment where you have low growth, low inflation, [and] central banks [that] can give you a lot of visibility on their future forecasts, then you need to adapt your portfolio construction,” said Henry McVey, chief investment officer of KKR’s balance sheet and head of the global macro and asset allocation team.


According to KKR, funds in the Burgiss U.S. Buyout Universe delivered an average annual return of 13.7 percent during periods of high inflation from 1981 to 2021, while the S&P 500 only gained 7.6 percent. The firm also found that PE funds have the strongest relative performance when public equities falter. In years in which the S&P 500 gained more than 15 percent, PE funds only generated an average excess return of 0.7 percent. But in years in which the S&P 500 lost more than 5 percent, PE funds beat their public market counterparts by 7.5 percent.

Of course, part of the outperformance of PE funds can be attributed to the fact that they aren’t marked to market like public stocks. This could make it appear that they have a less volatile and higher return profile. But in McVey’s view, even after taking the valuation lag into account, PE funds should still outperform the public markets if “private equity managers deliver on their operational improvement plans.”

“The number-one [place] where I think private equity distinguishes itself versus public equities has been operational improvement,” he said. “By focusing on the value drivers, you make the business better either by making it a more profitable business or improving its strategic position within an industry.”

The operational improvement is especially important during periods of high inflation and rising market volatility. According to Racim Allouani, who leads portfolio construction, investment risk management, and quantitative analysis at KKR, PE managers have more control over the performance of their portfolio companies during periods of stress.

“For every new deal, we all want to make sure the company is able to manage their costs versus their revenue,” Allouani said. “If you have higher inflation [and] higher rates, your cost of liabilities increases. We have the tools to reduce the debt burden by hedging the high rates that will come with high inflation.”

Sector exposure also contributes to the outperformance of PE funds. In the U.S., PE funds skew toward the technology, healthcare, and consumer discretionary industries. McVey said that these sectors tend to include companies that have more “capital-light models,” which is an advantage during inflationary periods.

Nevertheless, an increased allocation to PE funds may not be right for all investors, despite the benefits they can offer in the current environment. According to Clémence Droin, partner at the investment consultant Indefi, rising interest rates and faltering public stocks have already made many institutional investors overweight private equity. In addition, private equity isn’t always the best asset class for hedging the negative impact of inflation.

“To some extent, infrastructure and real estate are more qualified to [combat] inflation,” Droin said. But she added that the investment universe in PE has expanded over the past few decades, and that investors who can focus on the right sectors “can still be successful.”