For instance, over the last 20 years, private equity has beaten the annual return of the S&P 500 16 times.2 By limiting themselves to public markets, investors may risk missing out on an opportunity to invest in large, growing, and highly successful businesses. Investments in private market assets have long been utilized by large institutions for their potential portfolio-enhancing attributes. With the advent of new structures that may be better suited to individuals, the private markets represent an investment opportunity that continues to grow at a rapid pace.
The private domain is larger than most may realize. So too are the businesses within it — in fact, approximately 87% of US companies that generate $100 million or more in annual revenues are private.4 These companies utilize private capital markets to secure the funding they need to operate and grow their businesses, which can create investment opportunities.
As private capital markets have grown steadily over time, many high-quality companies have chosen to stay private for longer or even go from public to private. Conversely, public markets have witnessed steady delistings globally, while the number of US-listed companies has remained relatively flat over the last decade.
Public markets are often swayed by short-term sentiments and quarterly earnings pressures. The market risk that public investments are exposed to can cause meaningful changes in valuations, even if the fundamentals of the underlying company have not changed. Private markets operate on a longer horizon, affording managers flexibility to execute on strategies that may take time to scale. The buy-and-hold approach employed by most private market investments creates potential opportunities for differentiated performance and increased portfolio stability.
Investments in private market assets are managed by experienced fund managers who tend to have access to information beyond what would be available in public markets, and in some cases have the ability to effectuate change through control of the companies they invest in. The best private asset managers are not only experts in originating investments with outsized return potential, but also conducting extensive due diligence and actively managing their portfolios, which can provide an element of capital preservation not found in public markets.
Although private market investments are less liquid relative to public ones, investors are compensated for it in the form of an illiquidity premium. These assets don’t necessarily outperform public markets because of their illiquidity, but because illiquid private market assets and strategies tend to have attractive risk-return profiles. While private markets assets themselves may be considered illiquid, advancements in the fund structures that hold them have allowed investors to allocate to these strategies with regular opportunities for liquidity.
The upward trajectory isn’t a fleeting trend. Private market assets under management are expected to reach more than $24 trillion by the end of 2028, up from $6.3 trillion just ten years ago, thanks to several catalysts.6
Companies today appear to be choosing to stay private, in many cases, because they can afford to. An influx of patient capital (and capital providers) has enabled businesses to access financing without opening their proverbial doors to public investors. It’s a movement that not only enlarges the pool of high-quality assets but also underscores the growing recognition of private market benefits.
Public markets are particularly susceptible to macroeconomic shifts and geopolitical events. Recently, persistent inflation and rising interest rates have fueled uncertainty and, in turn, volatility. Investors are likely to continue allocating funds to private assets, which are typically less impacted by short-term factors as a result of less frequent valuations and longer investment horizons.
Private markets are no longer exclusive to the ultra-wealthy or large institutions. Technological advancements, innovative financial products, and digital platforms are bridging the gap between individual investors and private market opportunities. This democratized access means broader investor participation and a pathway to further growth.
Over the next few decades, $84 trillion of wealth is projected to change hands.7 As the largest wealth shift in history unfolds, there could be a noticeable change in investment philosophies. Younger investors, often more aware of and open to alternative investments, are showing a keen interest in diversifying beyond traditional public assets.
Almost 3 in 4 people between the ages of 21 and 42 do not believe it is possible to achieve above-average returns solely through stocks and bonds.8 Moreover, this cohort of younger investors allocates three times more funds to alternative investments than older generations do.
