When Private Funds Are Publicly Traded
Evaluating the performance of listed private equity funds on the LSE
By Daniel Rasmussen with Julia Grinstead
Private equity funds exhibit average annual volatilities around 10%, significantly below public equity markets.
Private equity boosters love this statistic. “Private equity (PE) seems to contradict the investment maxim that greater reward only comes with increased risk,” argue State Street Global Advisors. “On an observed basis, private equity has higher returns and lower volatility than public equities.”
But a growing chorus of critics argues that the asset class’s volatility numbers are understated and the industry is guilty of—to quote Cliff Asness—“volatility laundering.” Researchers at AQR estimated that PE could have a true volatility of 20-25%.
The debate between the two camps is heavy on theoretical questions about “de-smoothing” and public market equivalents, and it can be hard to know empirically who is right.
We believe that there is a clear way to resolve this debate. Since 1987, private equity funds have been publicly listed and traded on the LSE. These funds publish an internally calculated NAV but also have market-traded share prices. We can look directly at the volatility of the traded funds, compare to the listed NAVs, and get a real-life example of just how private equity assets trade when they are listed publicly. This is increasingly important as Vanguard and others prepare to launch publicly traded funds that include private equity assets.
We looked at 10 of the largest and most liquid London-listed private equity funds: HarbourVest Global Private Equity (HVPE), Pantheon International (PIN), NB Private Equity Partners (NBPE), HgCapital Trust (HGT), Oakley Capital Investments (OCI), Partners Group Private Equity (PEY), CT Private Equity Trust (CTPE), Patria Private Equity Trust (PPET), Apax Global Alpha (APAX), and ICG Enterprise Trust (ICGT).
These are not obscure no-name private equity sponsors but rather comprise a list that includes marquee brand-name firms and even includes funds-of-funds that own diversified holdings. Take, for instance, HarbourVest Global PE: HVPE is a closed-end fund managed by HarbourVest Advisers L.P. that typically invests its capital across numerous partnerships, vintage years, industries, and strategies. As of 2024, HVPE has a 62% geographic exposure to North America. Based on data from Capital IQ, HVPE shares have returned about 13% per year since inception. HVPE seems a relatively standard PE fund compared to the rest of the market, with a diversified portfolio and a high NAV value.
Examining the volatility of these listed funds’ stock prices compared with that of their NAV estimates, one comes to a very different conclusion regarding the risk of holding these assets. Traditional reporting by these PE funds has their NAV average at 14% volatility, about 0.9 times the market average of 16%. By annualizing the volatility of the stock trading price, one can see in the figure below that the market volatility is closer to 24%, or 1.5 times the market average.
Figure 1: Annualized Volatility Comparison, 2014–2024
Source: Capital IQ
The volatility of listed private equity looks comparable to AQR’s estimate—and to how small-cap equity indices trade. This is unsurprising, given that private equity portfolio companies tend to be low-margin, leveraged micro-caps—a riskier and higher volatility exposure than, say, the S&P 500.
This data set doesn’t just allow us to evaluate the true volatility of private equity, however. We can also look at the discounts to NAV to better understand the extent to which public markets believe that private equity NAVs are accurate. This is also an increasingly relevant question as U.S. congresswoman Elise Stefanik is now probing whether college endowments should be allowed to use NAVs rather than, say, recent secondary market transactions as the sole source of valuation for private assets.
The chart below shows aggregate market cap–weighted discount to NAV of this group of private equity funds.
Figure 2: Market Cap–Weighted Discount to NAV for Listed PE Funds
Source: Capital IQ
Today, these listed PE funds trade at 70 cents on the dollar! This is a massive gap relative to NAV that suggests quite a high degree of skepticism about reported NAVs. Even more remarkable, as recently as 2021, these funds were trading at 90 cents on the dollar. Public markets appear to have grown significantly more skeptical of private equity over the last four years.
Market observers attribute this change to rising interest rates shifting investor preferences toward more liquid assets, coupled with growing concerns over the perceived opacity in the underlying assets of portfolios. This shift in investor sentiment has led to greater scrutiny and caution around illiquid and opaque assets like PE funds. As a result, investors demand a higher liquidity premium, meaning a higher discount to NAV, to compensate for the elevated risk and reduced liquidity. This increased required return enhances the widening discount, pushing down the market prices of PE fund shares relative to their reported NAVs.
PE managers have taken note of this shifting investment landscape. Funds-of-funds tend to trade at larger discounts than direct PE, reflecting their higher fees and lower transparency. In response to depreciating discount values, many funds, such as Pantheon International, have begun reallocating portfolios toward direct investments to improve efficiency. Moreover, several PE funds have initiated share buybacks, boosting value for remaining shareholders.
Although the publicly traded universe is a small sample of the PE market, we believe we can nevertheless draw several meaningful conclusions, not least of which is that a healthy skepticism of PE’s reported NAV and volatility is necessary to understand the true risk of these funds’ portfolios.
Public equity markets don’t seem to buy what the private markets are selling. This could be a problem as PE funds try to exit their massive inventories either through IPOs or partnerships with firms that have broad retail distribution.
Acknowledgements: Julia Grinstead is a junior at Harvard College studying economics. She is the President of The Harvard Salient, Harvard’s undergraduate conservative paper, as well as the biggest Alabama football fan in Boston. After college, she hopes to work in finance.