This article may contain references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services. Nonetheless, our opinions are our own.
The information presented in this article is accurate to the best of our knowledge at the time of publication. However, information is subject to change, and no guarantees are made about the continued accuracy or completeness of this content after its publication date.
People have long thought of private equity as a way to make a lot of money and spread out their investments. But recent performance numbers from some of Canada’s biggest institutional investors, like pension funds, insurance companies, and university endowments, show that expectations and reality are starting to diverge more and more. This shortfall is making private equity investors and analysts rethink their assumptions about how to choose funds, build portfolios, and plan for the long term.
- Performance Data Highlights the Discrepancy
- Conditions Influencing Subpar Outcomes
- Comparing Private Equity with Public Market Alternatives
- Strategic Reassessment for Future Allocation
- Transparency as a Pillar of Improved Performance
- Sector Opportunities for Future Growth
- Conclusion
- Frequently Asked Questions
- Recommended Reads
Performance Data Highlights the Discrepancy
The following table provides a clear comparison of average annual returns from major institutional investor types against their respective benchmarks:
| Investor Type | Average Annual Return (%) | Benchmark Return (%) |
|---|---|---|
| Pension Funds | 5.4 | 7.2 |
| University Endowments | 6.1 | 8.0 |
| Insurance Companies | 4.8 | 6.5 |
This disparity suggests that access to private equity does not guarantee superior results. Several interdependent factors may be responsible for the persistent performance lag.
Conditions Influencing Subpar Outcomes
Several variables appear to shape the return profiles of Canadian institutional private equity holdings. These range from structural inefficiencies within portfolios to external pressures in the broader economic climate.
Market Exposure and Entry Timing
Many private equity investments are sensitive to macroeconomic cycles. Recent downturns and valuation resets have disrupted exit timelines and depressed asset valuations. If funds are committed during periods of market stress without counter-cyclical planning, recovery can be protracted.
Fee Structures and Return Dilution
High management and performance fees remain a significant drag on investor returns. Private equity typically involves both a management fee (often 1.5–2%) and carried interest (commonly 20% of profits above a hurdle rate). These fees can erode performance, especially when gross returns fail to materially exceed public market alternatives.
Constraints in Access and Allocation
Top-tier private equity funds are often oversubscribed, and not all institutional investors have equal access. This leads some to allocate capital to less competitive or unproven funds, increasing the risk of underperformance. In some cases, broad diversification across subpar managers exacerbates the problem rather than mitigating it.
Operational Diligence and Sector Misalignment
Some funds may lack specialized knowledge in emerging or niche sectors. Without tailored expertise, due diligence processes can fall short, resulting in overexposure to industries with slow growth trajectories or unanticipated volatility.
Comparing Private Equity with Public Market Alternatives
The following comparative analysis illustrates how private equity has performed against a common public market benchmark:
| Investment Type | Average Annual Return (%) | Standard Deviation (%) |
|---|---|---|
| Private Equity | 8.5 | 15.3 |
| S&P/TSX Composite | 6.2 | 10.4 |
Private equity has better long-term returns in this comparison, but it is also riskier and harder to get out of. These traits can make a portfolio less resilient for institutions that have fixed liabilities, like pension obligations.
Voted "Best Overall Budgeting App" by Forbes and WSJ
Monarch Money helps you budget, track spending, set goals, and plan your financial future—all in one app.
Get 50% OFF your first year with code MONARCHVIP
Strategic Reassessment for Future Allocation
In light of persistent underperformance, institutional investors are beginning to reconsider how private equity fits into broader asset allocations. Shifts are underway toward more selective participation, cost control, and improved alignment with long-term objectives.
Tactical Considerations for Portfolio Enhancement:
- Focus on concentrated investments with proven managers rather than over-diversification.
- Evaluate net-of-fee performance rather than headline figures.
- Integrate ESG screening to improve long-term viability and transparency.
- Monitor liquidity constraints to ensure capital flexibility in times of market stress.
Transparency as a Pillar of Improved Performance
Greater transparency from fund managers can help institutional investors make more informed decisions. Demand for clearer reporting on returns, risk exposure, and capital deployment timelines is increasing. A constructive relationship with fund managers should include:
- Comprehensive performance reporting across different market cycles
- Itemized disclosure of management and incentive fees
- Detailed investment rationales for sector and geography focus
This heightened scrutiny fosters greater alignment between investor expectations and fund manager actions.
Sector Opportunities for Future Growth
While private equity in traditional sectors has underperformed, emerging areas are offering renewed promise. Growth in technology, renewable energy, and healthcare is reshaping allocation strategies.
| Sector | Investment Outlook | Projected Growth Rate (%) |
|---|---|---|
| Technology | Strong | 15 |
| Renewable Energy | Moderate | 12 |
| Healthcare | Strong | 10 |
Investors are advised to explore funds with targeted expertise in these areas, which may offer better long-term performance and resilience through future economic cycles.
Conclusion
Investors are changing their plans because Canadian institutional private equity portfolios haven’t been doing well lately. High fees, bad timing in the market, limited access to top funds, and a lack of focus on a specific sector are some of the main reasons why returns are low. To get better results in the future, institutions are being more careful about who they let in, putting more emphasis on managing costs, and focusing on new growth areas like technology, renewable energy, and healthcare. Canadian investors can better align private equity with their long-term goals by doing a strategic reassessment and making things more clear. This will lead to more sustainable growth and a stronger portfolio.
Frequently Asked Questions
What is causing Canadian private equity portfolios to underperform?
Recent data highlights a combination of factors: excessive fees, limited access to elite funds, suboptimal timing of market entries, and insufficient sector diversification.
Why is this underperformance concerning for institutional investors?
Institutions such as pension funds rely on consistent, long-term returns to meet obligations. Chronic underperformance in private equity could affect funding ratios and future liabilities.
What strategies may help improve outcomes?
Improved due diligence, selective fund participation, fee negotiations, and allocation to high-potential sectors are all promising approaches. Portfolio reviews and scenario modeling can also support better decision-making.
Are Canadian investors uniquely affected?
While global volatility impacts all markets, Canada’s institutional landscape may be particularly exposed due to historical over-reliance on large funds and relatively conservative fund selection policies.
Reviewed and edited by Albert Fang.
See a typo or want to suggest an edit/revision to the content? Use the contact us form to provide feedback.
At FangWallet, we value editorial integrity and open collaboration in curating quality content for readers to enjoy. Much appreciated for the assist.
Did you like our article and find it insightful? We encourage sharing the article link with family and friends to benefit as well - better yet, sharing on social media. Thank you for the support! 🍉
Article Title: Private Equity Portfolios Underperform at Big Canadian Investors
https://fangwallet.com/2025/08/08/private-equity-portfolios-underperform-at-big-canadian-investors/The FangWallet Promise
FangWallet is an editorially independent resource - founded on breaking down challenging financial concepts for anyone to understand since 2014. While we adhere to editorial integrity, note that this post may contain references to products from our partners.
The FangWallet promise is always to have your best interest in mind and be transparent and honest about the financial picture.
Become an Insider
Subscribe to get a free daily budget planner printable to help get your money on track!
Make passive money the right way. No spam.
Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned. The opinions expressed here are the author's alone.
The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur including the potential loss of principal.
Source Citation References:
+ Inspo
Harris, R. S., Jenkinson, T., & Kaplan, S. N. (2016). How do private equity investments perform compared to public equity?. Journal of Investment Management.
