Most PE Funds Don’t Beat the Index: What That Means for Insurance Investors
The data challenge the assumption that PE as an asset class systematically outperforms public markets
Private equity has deployed over $150 billion into insurance since 2020. The thesis is straightforward: superior returns justify the illiquidity premium. But what does the performance data actually show?
The Kauffman Foundation’s analysis of its own venture and PE portfolio, one of the most comprehensive institutional self-assessments ever published, found that 62% of funds failed to exceed returns available from public markets after fees were paid. This wasn’t a sample of underperforming funds. It was the Foundation’s entire portfolio, including investments with “notable and exclusive partnership brands.”
The data indicates a persistent gap between gross and net performance: 78% of funds failed to deliver returns sufficient to reward patient, expensive, long-term investing. Only 20 of 100 funds beat a public market equivalent by more than 3% annually, and half of those began investing prior to 1995.
A January 2024 Harvard Business School working paper examining PE performance in the post-Global Financial Crisis era reinforced these findings, concluding that “the average or median PE funds do not actually outperform their PMEs since the GFC.”
The Fee Drag Problem
The standard 2-and-20 model, 2% annual management fees plus 20% carried interest on profits, compounds to significant value extraction over a fund’s life. Academic research from the Annual Review of Financial Economics estimates that fees consume 5-8% of annual gross returns.
The structural fee burden creates a high hurdle rate. A fund generating 15% gross returns might deliver only 8-10% net to LPs after fees, barely competitive with public market alternatives and substantially below what LP expectations require to justify the illiquidity premium.
For insurance investments specifically, this fee drag becomes particularly problematic. Genuine transformation in regulated industries requires 7-15 years. A 10-year transformation generating 15% gross returns, eroded by fees over that extended timeline, may deliver returns that don’t compensate for the capital lock-up.
Dispersion Matters More Than Averages
The data don’t suggest PE creates no value. Top-quartile funds do outperform, and the dispersion between top and bottom quartile is substantial, 14-18% annually according to Verus Investments research.
This dispersion is the critical insight. PE as an asset class doesn’t systematically outperform public markets. Individual manager skill and strategy fit determine returns. The wide performance spread means manager selection matters more than asset class allocation.
For LPs without access to consistently top-performing managers, the case for PE allocation weakens considerably relative to indexed alternatives. The question isn’t whether PE can generate returns; it clearly can in the right hands. The question is whether any specific LP has access to the managers who consistently deliver those returns.
The Selectivity Imperative
The 62% statistic isn’t an indictment of private equity. It’s a call for selectivity.
PE remains a viable strategy for investors with access to top-performing managers and opportunities that genuinely fit the financial engineering playbook. The managers who consistently outperform share specific operational capabilities: dedicated portfolio operations teams that implement operational platforming across holdings, proprietary deal sourcing through industry-specific networks, and structured value creation playbooks covering everything from procurement optimization to add-on acquisition integration. In insurance specifically, top performers leverage syndicated reinsurance structures and regulatory arbitrage strategies that require deep domain expertise most generalist funds lack.
For everyone else, the data suggest that indexed alternatives may deliver comparable or superior risk-adjusted returns without the illiquidity, complexity, and fee burden.
The burden of proof has shifted. PE allocation now requires demonstrating access to managers who can overcome the structural headwinds; not assuming that private markets inherently outperform public ones.
This performance reality shapes how PE approaches insurance. In Private Equity’s Insurance Playbook, I examined how these structural constraints explain PE’s revealed preferences; why $150 billion flowed into life insurance and distribution while commercial auto carriers were systematically avoided. The performance data here explain the “why” behind that pattern: when fee drag compounds over long transformation timelines, even competent execution can produce mediocre returns.
Different capital structures fit different opportunities. The data make that case with uncomfortable clarity.
This article was originally published on the Indenseo blog at indenseo.com/blog.
Author Note: This analysis draws on publicly available academic research, industry data, and regulatory filings. Statistics are cited to primary sources where available.
AI Disclosure: Research compilation utilized AI tools to discover and verify publicly available data sources and citations. All analysis, interpretation, and conclusions are original work.