Private Equity Funds Are Losing to the S&P 500. Why Exclusive Investments for the Wealthy Aren’t Always Better

For years, private equity has carried an aura of exclusivity as funds are generally reserved for wealthy investors, charged substantially higher fees than ordinary index funds, and promised access to opportunities unavailable on public markets. But lately, that exclusivity hasn't translated into better returns.

Private equity funds have significantly underperformed the S&P 500 over the past several years, according to data cited by CNBC. The figures highlight that expensive and difficult-to-access investments aren't necessarily superior to the inexpensive funds available to virtually anyone. Cambridge Associates' Private Equity Index, which tracks roughly 1,800 funds, returned an annualized 7.4% during the three years ending in March and 9.3% over five years, net of fees.

By comparison, an investment tracking the S&P 500 returned 18.3% annually over three years and 12% over five years. That means investors could have earned considerably stronger returns during those periods simply by owning a low-cost S&P 500 index fund.

The comparison is particularly notable because private equity is generally restricted to accredited investors. Individuals typically must have a net worth exceeding $1 million, excluding their primary residence, or annual individual income above $200,000 to qualify.

Still, private equity's recent weakness does not mean the asset class has always underperformed. Over the 25 years ending in 2025, Cambridge Associates' private equity index produced an annualized return of 12.8%, compared with 10% for the S&P 500.

Private investments can also provide opportunities unavailable on public exchanges. Funds can invest in companies years before they go public, use leverage to finance acquisitions and potentially benefit from the growth of younger businesses.

"By the time they come to market, most [companies] are pretty mature," Jon Baranko, chief investment officer at Allspring, told CNBC. Private assets can also add diversification to portfolios because their performance may be driven by factors different from those influencing publicly traded stocks and bonds.

Yet those potential benefits come with significant drawbacks. One is liquidity, as investors can generally sell shares of publicly traded stocks or ETFs relatively easily. Private equity funds, however, can impose lengthy holding periods and restrictions on withdrawals, potentially tying up an investor's money for years.

Another major consideration is cost, as traditional private equity funds have historically charged annual management fees of around 2%, plus approximately 20% of profits above certain thresholds. Mitchell Caplan, CEO of Willow Wealth, told CNBC that performance fees have been declining, with 15% becoming more common.

Those costs remain dramatically higher than index ETFs. The average index ETF expense ratio was just 0.14% at the end of 2025, according to Morningstar. Higher interest rates have created another challenge. Private equity benefited enormously from years of cheap borrowing because funds frequently use debt to acquire businesses.

From October 2012 through September 2022, when short-term rates remained consistently low, private investments substantially outperformed public markets, according to Allspring. That advantage reversed as borrowing costs climbed. From October 2022 through March 2026, Bloomberg's private equity index trailed the S&P 500 by 18 percentage points. "When rates went up in 2022, you've seen that reverse," Baranko said.

The debate is becoming increasingly relevant to ordinary retirement savers. President Donald Trump issued an executive order in August 2025 directing federal agencies to facilitate greater access to alternative investments, including private-market assets, in 401(k) plans. The Labor Department subsequently proposed a rule in March that could make it easier for workplace retirement plans to include private investments.