What is Private Equity?

Private Equity (PE) refers to buying stock or equity ownership in a privately-held corporation. Similar to buying stocks on the public stock market, except these private companies do not trade on an exchange. Which makes buying and selling shares more challenging, and the lack of access creates attractive investment opportunities.

Of the US corporations with $100M+ in revenue, over 87% are privately held.³ Over 215,000 companies globally have private equity or venture capital backing. Private equity and venture capital assets under management topped $11 trillion at the end of 2023.

So, why invest in Private Equity?

Comparing 20-year Returns: Private Equity vs S&P 500

Source: Pitchbook, as of December 31, 2023 Retrieved 3/31/2025.   Alternate source: Cambridge Private Equity Index Retrieved 3/31/2025.

Higher returns

For the last 20+ years, Private Equity as an asset class has generated returns of 15% annualized. Compare this to 20-year returns for US Stocks (S&P 500) of approximately 10% over the same period. ²

Private Equity has outperformed by +5% per year for over 20 years, ² with no signs of stopping or slowing. In fact, the outperformance has only widened in recent years, with the latest 5-year outperformance close to +8% annualized (2019-2023).

Over the next 20 year period, if the 15% and 10% returns repeat themselves, then Private Equity will nearly triple the return of US Stocks over the next 20 years (1536% return vs 572% return).

Lower risk of loss

Compared to the public stock market, Private Equity has historically offered lower risk, about half the volatility of the public stock market index. A regression analysis of historical data shows the Private Equity index has a 0.42 beta to the Russell 3000 (US all-caps index), with another study finding PE has a 0.50 beta to the S&P 500.
Sources: Cliffwater research, as of June 30, 2023. Period Q1 2006 – Q2 2023. and State Street Advisors (2019)

Perhaps more importantly, in the last three major crashes and bear markets (2008, 2020, 2022) Private Equity has experienced only half of the max drawdown when compared to the public stock market indexes. For example, in 2008, the largest recent crash, Private Equity was down -25% at the lowest point, while US stocks indexes were down around -46% at their lowest point (quarterly max drawdown).

Less liquidity

As they say: "there's no such thing as a free lunch", and Private Equity does have its drawbacks. As the name implies, Private Equity investments are privately held companies and do not trade on an exchange the way public stocks do. So the mutual funds that hold Private Equity investments are naturally less liquid as well.

There are now 20+ different Private Equity mutual funds that offer periodic, capped liquidity via a tender fund or interval fund structure. These mutual fund vehicles offer daily buy-ins, daily pricing, and quarterly or semi-annual redemptions of at least 5% of the fund's total assets each period. As a mutual fund, these funds must follow all the SEC rules on reporting, pricing, and audits -- offering much more transparency than a typical opaque LP structure.

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The Private Equity pitch:  give up liquidity in exchange for higher returns and lower risk

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Our preferred funds

Our target at Paragon is to select top-quartile funds, achieving top 25% performance for both return and risk, relative to their peers. With the ultimate goal being to outperform both equivalent-risk peers and the broader Private Equity asset class index (Cambridge, Pitchbook) regardless of the current market dynamic.

Below is a chart showing recent performance of our preferred Private Equity funds (first recommended 3/15/2024).

• Our Private Equity funds: +28% annualized (rounded)
• Public US Stock Indexes:   +20% annualized (average, rounded)

Source: Koyfin.com, retrieved 04/24/2026

Bottom line

If you are willing to accept some semi-liquidity on a portion of your portfolio, Private Equity offers the highest expected returns of any major asset class, driven by strong fundamentals, not short-term trends. Private Equity also offers lower risk than public stock markets.

Paragon recommends an allocation of 25-30% to Private Equity in your portfolio.