This is true not only in the investing landscape itself as an alternative destination for funds, but also in the broader economy as a more efficient means of funding business growth and infrastructure development.

Funds raised for private market deals have consistently exceeded public equity issuance every year for the past 10 years.^[1] The total amount invested is on track to double in size to $30 trillion by the end of the current decade.^[2]

Why is this, and more importantly, how can investors be a part of it? Below, we explore the answer to these two questions in more detail.

Higher returns

It’s probably best to begin any ‘why’ discussion with the most relevant data: that is, do private market investments actually outperform public investments, and if so by how much?

The answer - based on twenty years of data - can be found in the chart below:

What is behind these returns? The answer is multi-faceted, but ultimately comes down to two factors: 1) a broader universe of opportunities and 2) greater potential for control.

Not only are there more private companies than public ones, but companies are staying private for longer, and increasingly taking advantage of the terms that only private investors can offer.

From the investor’s perspective, the ability to influence company decisions (e.g. through a controlling stake) and to take a longer-term view give the breathing space for superior returns.

Public markets may have been an ideal vehicle for passive, index-based investing in the past. However, the combination of the above two factors makes private markets investing an ideal choice for the active investor.

Lower volatility

In addition to showing higher returns, private market investments have also shown more resilience during times of market stress.^[3]

Owing partly to the longer-term nature of the typical deals, and the fact that funds are tied up for longer, temporary market turmoil has less of an effect on valuations. This is not just a financial benefit - it is also less psychologically stressful for the investor.

The chart below demonstrates how endowments, that typically invest a larger amount (39%) in private markets, enjoy both improved performance and lower volatility in comparison to investors with lower allocations.

What is the catch?

The chart above also prompts the question: why does the 60:40 portfolio - with no private markets exposure - remain a go-to option for so many individual investors?

Part of the reason is that, until recently, the 60:40 portfolio was held up as a ‘tried and true’ approach. This belief has been shaken by the past few years.^[4]

However, the additional and more important  reason is that private markets investing has until now not been as accessible as investing in the public markets.

Endowment-type organizations are ideally placed to excel in the private markets space as they have the ability to hire specialist talent required to scrutinize and manage investments, as well as the time horizon needed to pursue longer-term growth agendas.

An individual investor, on the other hand, who is planning for retirement may have a longer-term time horizon but lack the resources and expertise to identify and execute private deals alone.

Conclusion

At The Family Office, we have adopted a structure similar to the ‘endowment’ model. Rather than funding a specific institution, however, we put our clients’ money to work in companies we have personally sourced from our network and vetted with our expert team.

We believe the high minimum investment thresholds for these funds—sometimes reaching millions of dollars—must be lowered to democratize access to these strategies.

As with any wave of growth, the coming private markets boom will have both casualties and beneficiaries, especially given the increased complexity of the investing process. With the right partner, however, you can expect to navigate the challenges effectively.

^[1] Blackrock - www.blackrock.com/corporate/literature/whitepaper/solving-the-private-markets-allocation-gap-insti.pdf

^[2] Private Equity International - https://www.privateequityinternational.com/partners-group-private-markets-aum-to-hit-30trn-within-next-cycle/

^[3] Bain & Company - https://www.bain.com/insights/private-equity-outlook-global-private-equity-report-2023/

^[4] The Family Office - https://tfoco.com/en/insights/articles/rethinking-investment-strategies-60-40-portfolio-evolution