Private Equity Replication: A Survey

Abstract

This study examines whether the returns of private equity (PE) buyout funds can be replicated using liquid, transparent public market instruments. Five recently developed replication indices designed to mirror U.S. buyout fund performance are analyzed. We construct a composite “Buyout Replica” from these indices and compare its performance to both the broad U.S. equity market and a comprehensive private equity fund index. Our findings indicate that over the past decade, the Buyout Replica delivered nearly identical cumulative returns as a PE fund index and the S&P 500, although the replication strategies exhibit higher volatility and experience short-term drawdowns in sync with public markets. In contrast, reported PE fund returns appear smoother, with fewer downturns, owing to illiquid holdings that are not frequently revalued. These results support the hypothesis that the key distinction between listed and unlisted equity is liquidity, not long-term return levels. The paper discusses implications for investors, suggesting that on average private equity’s excess returns (alpha) may be negligible after adjusting for risk factors, and that liquid replication alternativescould offer similar performance with lower idiosyncratic risk and greater transparency.