Private markets have surged to $10 trillion in AUM. But why have they underperformed compared to public markets?

(SeaPRwire) –   Let me share a riddle with you.

Or maybe it’s a contradiction, even: U.S. private markets are larger than they have ever been, and serve as the source of trillions of dollars in corporate value creation. Yet at the same time, over the past several years, private markets as a whole have underperformed public markets.

I was mulling over this late last week while attending an event hosted by investment manager Hamilton Lane, sifting through data on the somewhat puzzling state of private markets. It’s not that the overall vibes are entirely bad, for what it’s worth. But there are a few key, striking numbers that confirm this contradiction holds true.

For starters, total assets under management across all private asset classes now stand at $10 trillion, according to Hamilton Lane. Over the most recent 10-year period, the S&P 500 has delivered higher returns than private equity. (The gap is roughly 200 basis points: as of the end of September, the S&P posted a 15.3% return, while PE came in at 13.2%.)

This isn’t all tied to AI, though AI is certainly skewing results across the board. Amid the AI boom, private markets look concentrated at best (recent PitchBook data on venture dealmaking shows that if you remove the five largest deals, Q1’s record-high $267.2 billion total deal value falls by a staggering 73.2%). At worst, private markets have appeared deeply irrational. That said, the same can be said of public markets: Allbirds made the wildly confusing announcement that it is moving away from its signature lightweight sneakers to become an AI company, and its stock immediately jumped 70% in response. (I’ve never bought into the idea that markets are perfectly efficient. I think markets are driven by narratives, personally. So that checks out, I suppose.)

We are also quite possibly approaching an unusual collision between public and private markets. If SpaceX does follow through with its public listing, it will be the largest IPO in history. But as Tom Kerr, Hamilton Lane’s co-head of investments and co-head of secondaries, pointed out (and I believe he is correct): “I don’t know where all that capital is going to come from.” Elon Musk is reportedly aiming to raise up to $75 billion when SpaceX goes public. Does that amount of capital even exist? We will have to wait and see.

If SpaceX, Anthropic and OpenAI all go public at the same time, it will put the private markets’ wildcard financial instrument to the test: secondaries, a market I’ve long found fascinating, in part because we still don’t know how large the secondaries market actually is.

“When you look at the total valuation attached to these companies, the specific risk that exists right now is: Are you putting money into funding SpaceX pre-IPO at a price that ends up being higher than its IPO price?” said Kerr. “It will be interesting to watch the secondary trading activity that has been taking place for these companies. When Uber went public, there was a huge amount of secondary market activity. But at the end of the day, you would have gotten a better deal if you had just waited three months after its IPO to buy the stock.”

I don’t have a clear answer to this contradiction. After years of covering the venture capital space, the prevailing narrative is that private markets are the place to earn outsized returns. But perhaps no such guaranteed high-return space exists, and the pursuit of outsized returns is inherently reliant on unexpected lucky breaks and random occurrences.

Here’s what I can say for sure: If these mega-IPOs actually come to fruition, they will be far more complicated than unqualified wins for the companies and their investors. The market tide could turn, and things could get more chaotic than ever. And at that point, we might finally get some answers to these questions.

Talk to you tomorrow,

Allie Garfinkle
X: @agarfinks
Email: alexandra.garfinkle@.com

Submit your deal for consideration for the Term Sheet newsletter here.

Joey Abrams curated the deals section of today’s newsletter. Sign up for the newsletter here.