Investing in private markets

Investors be mindful of the risks inherent in private markets including illiquidity, longer lockup periods, leverage, concentration risks and limited control and transparency of underlying holdings. While risks cannot be fully eliminated, it is possible to mitigate them through extensive due diligence and strict manager selection, and by diversifying across vintage years, strategies and geographies. See also the more detailed section on risks at the end of the page.

We believe that alternative investments should be a key component of long-term portfolios for those investors that are willing and able to bear their unique risks. Investors considering putting money to work in private markets for the first time can consider the three following steps:

1. Construct an investment plan. As a general rule, holding up to 20% of a liquid portfolio in private assets should enable investors whose plans allow for illiquid private assets to avoid running short of cash, including in periods of market stress. This allocation may rise up to 40% if an investor has modest cash flow needs of their portfolio and/or can draw on liquidity from another source.
2. Consider how to adapt this investment plan for particular financial needs. Investors whose primary need is to raise income from their investments may want to consider income-bearing assets that do not add excessive volatility to portfolios. These can include private debt, private real estate, and private infrastructure with most likely only a modest allocation to private equity.
   On the other hand, investors whose main aim is to grow the value of their wealth through rising capital values could aim to generate higher returns from a long-term portfolio focused on private equity strategies. An all-public equity investor could fund their private equity allocation one-for-one from listed stocks.
3. Consider how consistency impacts overall private market portfolio allocations. The different mechanics between public and private markets mean investing in the latter may require a commitment to invest continuously and in a diversified manner in order to reach long-term allocations. 
   Initial investments may focus on private market approaches that allocate money to multiple managers for diversification purposes. Investors may also consider so-called evergreen or perpetual capital approaches that are fully funded from day one and invest in existing assets, as opposed to traditional capital call approaches where money is called from investors but not be invested until some time after.                                                                                                                                    

What are the most attractive opportunities in private markets? Are private credit a source of concern? Is the distribution environment improving for private markets? Twice a year, our Deep Dive – Private Markets Outlook video series will update you on the latest developments in private equity and broader private markets, and where we see the best opportunities

And it’s not just about returns. Some strategies can bring an element of inflation hedging to a portfolio, which remains a lingering concern in many markets. De-globalization and de-carbonization trends may stoke more inflation in the future. This kind of world could see assets like infrastructure perform particularly well.

While repricing has been fast in public markets, private markets, which only moderately participated in the move higher so far, have remained broadly stable. However, this new backdrop of potentially stickier inflation and higher-for-longer interest rates, on the back of resilient economic growth, does underscore the importance of selectivity in the current environment.

For those investors who can tolerate the illiquidity required to invest, private assets can help investors build a portfolio that is more diversified and that has the potential to generate higher risk-adjusted returns.

First, incorporating private assets can provide access to investment opportunities which are simply unavailable in public markets. Second, historically, investors have been rewarded for their patience with higher returns. For instance we estimate private equity to outperform public equity by about 2% per year over this economic cycle.