A new Scientific Infra & Private Assets (SIPA) report entitled “What is the Private Equities Market? And how different is it from public equities?” establishes that there are significant differences between the private and public equities space. Public markets have far fewer companies (48k vs ~1 million+) relative to the private equities market, while the median and mean size and profitability is greater than observed in private markets. This has implications when comparing returns and risk across the two markets.

Despite differences, both markets incorporate multiple systematic risk factors when pricing assets. Discount rates (or expected returns) show there is some link between the two distinct markets – further, they are not constant and vary with market conditions. This contrasts with the view of a fixed ‘liquidity premium’ or other spread vs bond yields or proxies.

The private equities market is a very large market with its own set of players and characteristics. This has implications for asset pricing and benchmarking performance. Institutions that continue to rely on referencing public equities returns against private equities returns, risk conflating two markets with different dynamics. This has the potential to mislead constituents and beneficiaries regarding the true risk-adjusted performance.