US inflation rose to 3 percent in January, exceeding economists’ expectations of 2.9 percent, reinforcing arguments for a more cautious approach to interest rate cuts by the Federal Reserve.
The unexpected increase rattled both equities and bonds last week, with private equity firms proving particularly vulnerable, suffering declines following the CPI release on Wednesday.
Industry giants Blackstone and KKR have each lost over 5 percent this year, while the broader US market has gained 4 percent.
Higher interest rates drive up borrowing costs, making leveraged buyouts and refinancing more expensive, thereby slowing deal activity. Meanwhile, valuation pressures mount as higher discount rates erode portfolio values and complicate exits.
However, a long-term perspective paints a different picture. While the S&P 500 has returned just over 80 percent over five years, leading private equity firms such as Blackstone, Apollo Global Management, and KKR have at least doubled that. Ares, a slightly smaller player, has surged 360 percent over the same period.
The prospect of outsized returns continues to attract institutional investors. Yet, five-year performance data presents a paradox: those who simply bought shares in Blackstone, KKR, Apollo, or Ares may not only have outperformed the market but also surpassed many investors who allocated capital to their funds.
Private equity returns
Comparing public and private markets is complex, not least because private equity returns remain opaque. The internal rate of return (IRR) is the standard metric, but its accuracy is widely debated.
The largest US private equity firms are publicly listed and are therefore required to report regularly to the Securities and Exchange Commission (SEC). Excerpts from KKR and Apollo’s annual reports reveal IRRs of 26 percent and 39 percent, respectively.
While these reported returns appear impressive, some experts caution that the calculation methods used can be misleading.
Critics such as Ludovic Phalippou, professor of finance at Oxford and author of Private Equity Laid Bare, warn that investors should not confuse IRR with actual returns. For assets that are not continuously traded and involve interim cash flows, determining a true return is far more complex.
MSCI, which tracks over 12,000 private capital funds, estimates the median IRR at 9.1 percent. Meanwhile, the American Investment Council, the industry’s most prominent lobbying group in the US, claims private equity funds have delivered a median IRR of 15.2 percent over the past decade.
“Notably, publicly listed private equity firms do not disclose additional performance metrics. Returns of this magnitude over a prolonged period are exceptional and raise questions about the underlying investment strategies,” said Phalippou.
Further gains ahead?
Despite concerns about transparency and performance measurement, public markets have demonstrated strong confidence in private equity firms. Wall Street analysts remain broadly optimistic, even as the stocks have come under pressure.
Ares, Apollo, and KKR all hold a “Buy” consensus rating from analysts, while Blackstone is rated as “Hold.”
Apollo, in particular, stands out as a hedge fund favourite. The Goldman Sachs Hedge Industry VIP ETF, which tracks the fifty most widely held long positions among US hedge funds, has consistently included Apollo among its top holdings.
Enthusiasm for private equity stocks is not limited to the US. In Europe, publicly traded PE giants have also delivered impressive gains. Sweden’s EQT has risen by approximately 20 percent this year, while Luxembourg-based CVC Capital Partners has gained 8 percent since the start of 2025. The broader European market has significantly outperformed since its 2024 listing.
CVC Capital Partners and EQT outperform the market
Public shareholder or limited partner?
For investors, the key question is whether simply owning shares in private equity firms is an effective way to gain exposure to the private market boom.
Unlike limited partners (LPs), shareholders benefit from management fees. To generate these, private equity firms do not need exceptional performance—they need capital.
“The 20 percent performance-related fee is not particularly relevant to the revenue generation of private equity firms,” said a private equity fund selector at a New York-based multi-family office. Performance matters for brand reputation, he added.
“As long as firms maintain strong relationships with institutional investors and deliver acceptable IRR estimates, asset owners continue allocating capital to them—and shareholders benefit,” he explained anonymously.
“Pension funds and other institutional investors are naturally risk-averse, and there is a well-known saying in wealth management: ‘No one gets fired for giving money to Apollo’—or any other major private equity firm.”
A trade-off
Public investors enjoy liquidity, public market transparency, and potentially higher returns. However, that liquidity comes at a cost. Publicly listed private equity firms remain exposed to stock market volatility, as demonstrated this week.
Private equity stocks are particularly sensitive because their underlying investments are highly leveraged, tied to broader economic trends, and dependent on secondary and public markets for exits.
Some publicly traded firms even underperform the market in the long run. Carlyle Group, another US private equity giant, has returned just 54 percent over five years, lagging behind the S&P500. On Tuesday, its fourth-quarter results disappointed, sending shares lower despite strong growth in capital market activities.
But shareholders have an exit route: they can sell. LPs? They are locked in and must wait for their capital to generate returns.