Over the past decade, private investment capital has seen tremendous growth, increasing from $4 trillion to a staggering $14 trillion. This surge, primarily driven by institutional investors, stems from a strong desire for unique returns and alpha generation.
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Private investments make sense in this context, as alternative assets have consistently outperformed global public markets over 10-, 15-, and 20-year periods.
Today, individual investors are increasingly participating in these markets. Bain & Company estimates that individuals now hold around $4 trillion in alternative assets, with the potential to reach $12 trillion within the next decade—a dramatic rise.
However, incorporating alternatives into personal portfolios demands thoughtful consideration, and we anticipate that most individuals will rely on the guidance of seasoned advisors to navigate this process.
Those interested in alternative investing should concentrate on three primary themes: embracing the longer time horizons these investments typically require, allocating capital that can remain untouched for extended periods, and diversifying both within and across portfolio segments.
This approach is relevant for individuals across various wealth levels, as new open-end funds are making alternatives more accessible, particularly for high-net-worth investors.
With over 20 years of experience assisting ultra-high-net-worth clients in growing and preserving wealth through alternatives, I believe that private market investments offer clients with suitable risk tolerance the chance to build a diversified portfolio.
Thanks to recent innovations in alternative investment products, the most immediate opportunities are available to those in higher wealth brackets, but access is steadily expanding.
As more companies choose to remain private longer, portfolios confined to public equities are likely to miss key market opportunities. Since 1996, the number of publicly traded U.S. companies has decreased by 43%, while private equity-backed companies in the U.S. have increased five-fold since 2000. Currently, fewer than 15% of U.S. companies with over $100 million in revenue are publicly listed.
Consequently, individual investors relying solely on public markets have limited exposure to dynamic, high-growth companies. This trend of companies opting for private ownership is likely to continue, given the advantages it offers in terms of control, operational flexibility, reduced regulatory demands, and ample capital access.
While private markets present benefits like broader economic exposure, diversification, and alpha potential, they differ significantly from public markets and require careful consideration. Private markets often require longer-term capital commitments, which means selecting investment vehicles with attention to asset allocation size is crucial.
These markets are also less efficient than public markets, underscoring the importance of choosing managers with consistent strategies and a track record of outperformance over time.
Our long-standing advice to clients is to diversify their investments across a variety of alternative asset classes, managers, and funds. For many years, we have built alternative portfolios for ultra-high-net-worth clients who can handle illiquidity, typically with 20-30% of their assets in alternatives. High-net-worth investors might consider a smaller allocation, such as 10-15%, as a reasonable target.
We advise clients invested in traditional closed-end funds to maintain steady allocations across multiple strategies, ensuring consistent amounts each year. This approach can improve diversification by spreading risk across different “vintage years.”
The rise of open-end investment vehicles has simplified access to alternatives across wealth levels. Unlike traditional closed-end funds, which involve capital calls and staggered drawdowns, open-end funds require full capital upfront.
These funds often have lower minimums than closed-end options, enabling high-net-worth individuals to diversify their alternative portfolios more effectively.
While these funds provide some liquidity, investors should be aware that they are not fully liquid. In favorable market conditions, open-end funds usually allow redemptions on a quarterly basis.
However, if there is a surge in redemption requests, complete liquidity may not be available, and investors may face restrictions on withdrawing funds.
Investors should only commit amounts they are comfortable locking away, treating open-end funds similarly to traditional alternative investments, which are mostly illiquid.
Many newer open-end funds have limited performance histories, as they have not weathered complete market cycles. Nevertheless, their managers may bring extensive experience in other investment structures and strategies. Investors should assess the resources and strengths of these teams, including competitive advantages and expertise.
For instance, in private credit, success may hinge on sourcing high-quality credit opportunities, while in private equity, top managers excel in driving organic growth, resolving operational challenges, and improving efficiencies within companies.
Judging these factors can be challenging for individuals, which is why we recommend working with financial advisors who have access to wealth platforms featuring reputable alternatives managers. These advisors can help investors diversify by monitoring multiple managers and guiding their investment selections.
Over time, as retirement plans consider integrating alternatives with naturally long time horizons, new opportunities will emerge for investors at various wealth levels. With companies staying private longer, an emphasis on alpha generation, and growing interest in portfolio diversification, the expansion of opportunities and access to alternative investments for individual investors appears poised to continue.
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