When people think of investing, most imagine buying and selling stocks on public exchanges. However, alongside public markets there is another investment universe that has long attracted the attention of large investors, pension funds, and billionaires alike. It is called private equity.

Private equity is often associated with above-average returns. According to numerous studies, this asset class has indeed outperformed traditional stock market indices over the past several decades. For example, MSCI reports that global private equity investments have outperformed publicly traded equity markets by approximately 4.5 percentage points per year over the last twenty years.

How is this possible? And can this trend be expected to continue in the future amid higher interest rates and growing economic uncertainty?

What Is Private Equity?

Simply put, private equity involves investing in companies whose shares are not publicly traded on stock exchanges. Private equity funds acquire ownership stakes in businesses, help them grow, improve efficiency, or expand into new markets. After several years, they typically sell their stake and, if successful, realize a profit.

Unlike a typical stock market investor, private equity investors often have significant influence over the management of a company. Rather than remaining passive observers, they actively participate in strategic decision-making.

Where Do the Higher Returns Come From?

One of the primary reasons is this active approach. While investors in publicly traded stocks generally wait to see how a company performs, private equity funds seek to increase the company's value directly.

For example, they may support digital transformation, professionalize management, facilitate international expansion, or pursue acquisitions of competitors. The goal is to make the company significantly larger and more profitable within a few years than it was at the time of investment.

Another important factor is the long-term perspective. Public markets often react to quarterly earnings, economic news, or investor sentiment. Private equity funds, by contrast, typically operate on investment horizons of five to ten years. This allows them to implement changes that may only generate results over a longer period.

The Secret Weapon: Debt

A significant contributor to private equity's historical success has been the use of debt financing. Private equity funds have frequently acquired companies using borrowed capital, with the acquired company itself subsequently repaying the debt.

If the business grows while the debt gradually declines, the value of the investors' equity can increase at an accelerated pace. This mechanism has often boosted overall investment returns substantially.

However, this is also where an important caveat lies. A large portion of private equity's success over the past two decades coincided with a period of exceptionally low interest rates. Cheap financing made it possible to execute transactions under conditions that can no longer be taken for granted today.

The New Reality of Higher Interest Rates

Since 2022, the investment environment has changed significantly. Borrowing costs have risen, and acquisition financing has become more challenging. As a result, private equity funds can no longer rely primarily on financial leverage.

Instead, they must focus more heavily on genuine operational improvements. Revenue growth, productivity enhancements, technological innovation, and more effective management have become more important than ever before.

For investors, this is not necessarily bad news. On the contrary, success will increasingly depend on the quality of fund managers and their ability to create real value rather than simply benefiting from inexpensive financing.

Does Private Equity Still Have the Edge?

The answer is not straightforward. Historical data suggests that private equity has consistently delivered higher returns than public equity markets over the long term. At the same time, investors must accept lower liquidity, longer investment horizons, and higher risk.

Furthermore, performance differences among private equity funds tend to be much greater than among traditional stock funds. While top-tier managers can generate highly attractive returns, weaker funds may underperform even a broad market index.

One thing is certain: the era in which cheap debt could be relied upon as the primary driver of returns is over. The future of private equity will depend more than ever on the ability to identify high-quality businesses and actively help them grow.

Ultimately, this will determine whether private equity can maintain its reputation as an asset class capable of outperforming public markets over the long term. For both investors and business owners, a new chapter is beginning—one in which experience, strategy, and genuine value creation will play the leading roles.

At Stone & belter, we closely monitor developments and trends in the private equity market. In light of the factors outlined above, we carefully select the funds that we subsequently introduce to our investment clients. Has this asset class captured your interest? Do not hesitate to contact your advisor, who will be happy to discuss the available options with you and help identify an investment solution that best suits your needs.