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

I have a riddle for you. 

Or a contradiction, perhaps: The U.S. private markets are bigger than ever, and the source of trillions in company value creation. And, at the same time, for the last several years, the private markets as a whole have underperformed the public markets. 

I was thinking about this late last week as I sat at an event run by investment manager Hamilton Lane, running through data on the somewhat bemusing state of the private markets. It’s not that the vibes are wholly bad, per se. But there are a few major striking numbers that bear out this contradiction. 

First, there’s now $10 trillion in assets under management across all private assets, according to Hamilton Lane. Simultaneously, the S&P 500 has outperformed private equity over the most recent ten-year period. (The difference is by about 200 basis points: At the end of September, the S&P was at 15.3% and PE was at 13.2%.)

And this isn’t all about AI, though AI is certainly lopsiding everything. The private markets, amid the AI boom, have looked at best concentrated (recent PitchBook data showed that, in venture dealmaking, if you cut out the five largest deals, Q1’s record-high $267.2 billion in deal value drops by a staggering 73.2%). At worst, the private markets have looked wildly irrational. Then again, you could say the same of the public markets: Allbirds’ wildly baffling announcement that it’s now eschewing its feathery sneakers to be an AI company sent its stock rocketing by 70% in response. (I’ve never much believed in the idea that markets are perfectly efficient. I think markets are narrative-vehicles, but that’s me. So, I mean, I guess.)

We’re also, very possibly, nearing a public-private market collision that could get weird. If SpaceX does, in fact, go public, it’ll be the largest IPO ever. But as Tom Kerr, Hamilton Lane’s co-head of investments and co-head of secondaries, pointed out (I think, correctly): “I don’t know where all that money is coming from.” Elon Musk is reportedly looking to raise up to $75 billion as SpaceX goes public. Does that money exist? We’ll see. 

And if SpaceX, Anthropic, and OpenAI all go public in tandem, it will test the financial instrument wild card of the private markets—secondaries, which I’ve marveled at, in part because we just don’t know how big the secondaries market even is. 

“In the overall quantum valuation associated with these companies, the specific risk that may exist today is: Are you rolling in and funding SpaceX pre-IPO…above the IPO price?” said Kerr. “It’ll be interesting to see the secondary trades that have been happening in those companies. When Uber went public, there was a lot of activity. But ultimately, if you’d just waited and bought the stock three months after it went public, that would have been a better trade.”

I don’t know what the answer is. The narrative, having spent years covering venture, is that the private markets are the place for outsized returns. But maybe there’s no such place, and the pursuit of outsized returns is inherently the result of unreasonable wonders and accidents.  

What I will say is this: If these mega-IPOs do materialize, they’ll be more complicated than all-out victories for the companies and investors. The tide could wash out, and things could get messier than ever. And then perhaps, we’ll get some answers.

See you tomorrow,

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

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This story was originally featured on Fortune.com