Asset Allocation
The rise of private markets
Private markets refer to investments made in asset classes that are not traded publicly on an exchange. These asset classes – for example private equity, private credit, real estate and infrastructure are playing an increased role in financing the economy, and the growth of private markets does not show any signs of slowing down. Total AUM across private markets asset classes is expected to reach USD 30 trillion by the early 2030s, up from USD 15 trillion last year.1
Fundraising has been driven by the growing role of private markets in the investment landscape. The asset class has now surpassed global public markets equity issuance each year since 2016 and 87% of US companies that have over USD 100 million in revenue are privately owned as of last year, representing a broad cross section of the economy.2 Private markets are also stepping in to finance infrastructure demands of the next generation including more data centers, better power grids, and financing for ongoing improvements. For investors seeking diversification and exposure to the overall economy, private markets should be considered.
Why invest in private markets?
When compared with a traditional 60/40 client portfolio, a portfolio that incorporates private markets assets can offer diversification benefits and has the potential to improve return outcomes. Private markets managers often target sustainable growth over longer-term holding periods than public markets which can result in portfolio resilience in times of market stress and inflationary environments.
Private markets have offered attractive risk/return features that may complement a traditional 60/40 portfolio
Source: BlackRock and Partners Group, as of September 2024. Annualized volatility refers to the annualized standard deviation of quarterly returns. Traditional portfolio assumed to consist of 60% public equities and 40% fixed income. The high risk portfolio represents a +30% allocation to private markets, with an allocation of 65% Private Equity, 20% private infrastructure, 5% private credit, 5% private real estate and 5% Hedge Funds. Public equities and fixed income reduced proportionally from the Traditional portfolio. Hedge Funds returns based on Bloomberg Hedge Fund Index (BHEDGE Index). Other private markets returns based on Cambridge Associates quarterly net return data between December 31, 2013 and December 31, 2023. Private equity returns based on PE Buyouts, Venture Capital and Growth Equity universe. Private credit returns based on Global Subordinated Capital, Senior Debt, Credit Opportunities and Control-Oriented Distressed universe. Private infrastructure returns based on Global All Infrastructure universe. Private real estate based on Global All Real Estate universe. Public equities refers to MSCI World Equity (NDDLWI Index), fixed income refers to Bloomberg US Aggregate Bond Index (LBUSTRUU Index). Management fee of 0.1% assumed for all public market asset classes except hedge funds. Performance shown is calculated net of all fees. Data shown over a 10-year period up to December 31, 2023. Portfolio returns do not consider currency hedging. For illustrative purposes only. Past hypothetical performance is not indicative of future results. Indexes are unmanaged and one cannot invest directly in an index. Please see end notes for limitations of back-tested portfolios.4
How can individual investors access private markets?
Although institutions have been investing in private markets for decades, individual investors have relatively little exposure to private markets, despite the growing role the asset class plays in financing the economy and the attractive risk-adjusted returns.3
Sources: Partners Group analysis of data from: NACUBO US Endowment peer average portfolio 2023; 2023 Fidelity Institutional Insights: A Study of Allocations to Alternative Investments by Institutions and Financial Advisers; S&P Capital IQ; McKinsey Global private Markets Review 2024: Private markets in a slower era. For illustrative purposes only. Returns for hypothetical portfolios above is backtested.3
In recent years, the industry has expanded access to the wealth segment - primarily focused on "evergreen" funds that better meet the criteria of the private wealth market, including minimum investment amounts as low as USD 10,000 and straightforward reporting. Evergreen funds tend to have monthly valuations that allow frequent subscription windows. In addition, there can be an option for investors to redeem at quarterly intervals, subject to certain restrictions.
The advantages of private markets evergreen funds have led to a rapid rise in the number of vehicles launched in recent years. However, most evergreen funds typically cover only one asset class or a single sub-strategy, and gaining broad exposure to a portfolio of private markets investments can still be operationally challenging.
As result, BlackRock and Partners Group are working on a multi-alternative model portfolio that could help advisors and their clients meet their needs. Private markets continue to evolve and we believe demand for simplified access to the asset class is growing. A single comprehensive model solution could potentially allow financial advisors to help clients more easily and more efficiently move toward broad-based exposure to private markets and liquid alternative assets in scalable ways.
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1. Partners Group Analysis; Preqin (2023).
2. Capital IQ, BlackRock as of Dec. 31, 2023. Represents the number of companies with annual revenues greater than $100 million.
3. BlackRock Global Family Office Survey, January 2023, Cerulli U.S. High-Net Worth and Ultra-High-Net-Worth Markets, 2023, Morningstar, BlackRock, Aladdin “Advisor Models” as of 3/31/24.
4. Back-tested portfolios: The back-tested past performance returns are shown for illustrative purposes only and are not meant to be representative of actual performance returns of any account, portfolio or strategy. The asset classes in the back-tested portfolios were selected with the full benefit of hindsight, after their performance returns over the period shown was known. It is not likely that similar results could be achieved in the future. Back-tested performance returns have certain limitations. Unlike actual performance returns, they do not reflect actual trading, liquidity constraints, fees and other costs. Back-tested performance returns also assume that asset allocations would not have changed over time and in response to market conditions, which might have occurred if an actual account had been managed during the time period shown. No representation is being made that any account, portfolio or strategy will or is likely to achieve results similar to those shown.
FOR PROFESSIONAL, INSTITUTIONAL, WHOLESALE AND QUALIFIED INVESTORS/PROFESSIONAL, QUALIFIED AND PERMITTED CLIENT USE ONLY
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