Summary of Podcast Episode E196: Professor Steve Kaplan: Do Privates Really Outperform the S&P 500?

Podcast Information:

• Title: How I Invest with David Weisburd
• Host/Author: David Weisburd
• Episode: E196: Professor Steve Kaplan: Do Privates Really Outperform the S&P 500?
• Release Date: August 6, 2025

1. Yale and Harvard's Divestment from Private Equity

The episode opens with Host David Weisburd questioning why prestigious institutions like Yale and Harvard are reducing their exposure to private equity. Professor Steve Kaplan responds by outlining several factors influencing this decision.

Steve Kaplan [00:04]: "I think first of all, ... by selling some of their private equity portfolio, they get more liquidity."

Kaplan suggests that liquidity concerns, dissatisfaction with certain funds, and favorable secondary market conditions led these institutions to divest.

2. Kaplan's Strategies for Enhancing Portfolio Liquidity

When asked how he would advise an institution like Yale seeking liquidity, Kaplan emphasizes reallocating funds from less performant asset classes.

Steve Kaplan [01:08]: "I reduce my hedge fund exposure. I also would say the same thing about infrastructure and real estate."

He recommends decreasing allocations to hedge funds, infrastructure, and real estate to enhance liquidity.

3. Kaplan's Research on Buyout Performance vs. S&P 500

Kaplan delves into his extensive research comparing buyout private equity returns to the S&P 500 over the period from 2000 to 2019.

Steve Kaplan [01:58]: "...buyout funds ... running at 360 basis points above the S&P 500 over that period."

Using the Kaplan Shore Public Market Equivalent (PME), Kaplan demonstrates that North American buyout funds significantly outperformed the S&P 500, showcasing a 3.6% annualized excess return.

4. Addressing Biases in Private Equity Data: The Kaplan Shore Index

Kaplan explains the development of the Kaplan Shore index, a tool designed to standardize private equity performance data for accurate comparison with public markets.

Steve Kaplan [05:34]: "The public market equivalent is basically saying apples to apples. You put your money in the S&P 500, you put it into the private equity."

This index ensures that comparisons between private equity and public markets like the S&P 500 are methodologically sound, accounting for cash flows and performance timelines.

5. Debating Private Equity Performance Criticisms

The conversation shifts to critiques from academics like Ludo Filippo, who argue that private equity metrics are often manipulated.

Steve Kaplan [09:13]: "These numbers ... are quite real. So to say they're not real is wrong."

Kaplan counters these criticisms by emphasizing the robustness of his data, which is derived from limited partners rather than generalized partners, thereby minimizing biases.

6. Under/Over Marking Practices in Private Equity

Kaplan discusses how private equity managers historically tend to under-mark their portfolios to maintain conservatism, especially during fundraising phases.

Steve Kaplan [24:20]: "Historically ... on average, they under marked a little bit."

However, during periods of successful fundraising, some managers may adopt more aggressive marking strategies. Kaplan asserts that overall, buyout performance remains strong, especially when isolating pure buyout funds from other asset classes.

7. Mega Funds vs. Middle Market Funds Performance

A significant portion of the discussion focuses on the performance disparities between mega funds and middle market funds within private equity.

Steve Kaplan [28:04]: "The mega funds ... their PMEs are lower than the average buyout PME."

While mega funds manage larger capital pools, they often underperform compared to middle market peers due to challenges in exiting large deals effectively. In contrast, middle market funds exhibit more consistent outperformance relative to the S&P 500.

8. Impact of Fees on Private Equity Returns

The conversation touches on the implications of the traditional "2 and 20" fee structure in private equity.

Steve Kaplan [31:37]: "Take a 25% gross ... turns into like 19 net."

Kaplan explains that high fees can significantly erode gross returns, translating substantial percentage points into annualized fees, thereby affecting net performance for investors.

9. Future Outlook for Different Segments of Private Equity

Looking ahead, Kaplan expresses cautious optimism about various segments within private equity, highlighting the enduring value-add capabilities of buyout and venture capital funds.

Steve Kaplan [33:21]: "The middle market I think is better because they can sell ... it's a lot easier to exit."

He emphasizes that while mega funds face challenges in deal exits, middle and lower middle market funds are better positioned to continue generating robust returns due to their operational focus and easier exit strategies.

10. Characteristics of Successful Private Equity Investors

Kaplan shares insights into the traits that predict success in private equity, drawing from his extensive experience teaching the subject.

Steve Kaplan [38:39]: "You're aggressive, you're articulate, you can do the numbers and see the big picture."

He identifies analytical prowess, big-picture thinking, and strong communication skills as key indicators of successful private equity professionals.

11. Timing Investments and Market Cycles

The duo explores the importance of market timing in private equity investments, with Kaplan highlighting historical patterns where periods of high investment influx often precede mediocre performance.

Steve Kaplan [40:52]: "That's when a lot of money was going in and particularly after a couple of years when a lot of money has gone in. Those are vintages that are historically not good."

Kaplan advises maintaining consistent investment allocations rather than attempting to time the market, drawing parallels to strategies like dollar-cost averaging.

12. Comparing Venture Capital and Buyout Performance

Kaplan provides a nuanced comparison between venture capital and buyout performance, noting that venture capital exhibits greater variability and skewed returns compared to the more consistent buyout segment.

Steve Kaplan [46:22]: "Venture has had periods where it's well outperformed the S&P 500... but another where it hasn't."

He underscores that while venture capital can offer significant upside during boom periods, it also carries higher risks and variability, making it a more complex asset class to evaluate.

13. Fund Performance Persistence

In closing, Kaplan touches on the persistence of fund performance, suggesting that top-performing funds tend to continue outperforming over time.

Steve Kaplan [51:42]: "52% of funds raised post 2000 had above median performance, some persistence, 32% at top quartile performance."

This indicates a notable degree of consistency in fund performance, reinforcing the importance of selecting top-tier private equity managers.

Conclusion

Professor Steve Kaplan provides a comprehensive analysis of private equity's performance relative to the S&P 500, addressing both its strengths and the challenges it faces. Through meticulous data analysis and a robust methodological framework, Kaplan substantiates the argument that private equity, particularly buyout funds, can deliver superior returns compared to public markets. However, he also acknowledges the evolving landscape, especially concerning mega funds and venture capital, emphasizing the need for strategic allocation and diligent manager selection.

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