Why invest in private market alternatives?

April 15, 20233 min read
Why invest in private market alternatives?
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What are alternative assets? 

Simply put, any investment outside stocks, bonds, or cash is considered an alternative. Most alternatives are not publicly traded on an exchange; instead investments are made on private markets. 

The most common alternative investments include: 

  • Real Estate
  • Private Credit
  • Private Equity/Venture Capital 
  • Collectables
  • Structured Products 

Previously only accessible to institutions, private market alternatives are rapidly becoming a meaningful part of many individual investor portfolios. Alternatives can compliment a traditional portfolio, potentially delivering stronger risk-adjusted returns. 

Advantages of private market investments

While each alternative investment is unique, the following characteristics generally apply across private markets.

1. Diversification 

Portfolio diversification previously meant holding a selection of stocks and bonds. Now investors have access to a broader universe of returns than ever before. 

Alternative investments tend to move more independently of public stocks and bonds. This means that if public markets fall, your private market investments are less likely to be impacted.

2. Historically higher returns 

Private market investments have historically outperformed public stocks and bonds. This is primarily due to the following: 

  • Lower liquidity: Private investments tend to have some level of illiquidity — or an inability to be converted to cash at any time. In exchange, investors can be rewarded with higher returns, a concept known as the liquidity premium. 
  • Longer time horizon: While terms range, alternative assets are often held for multiple months or years. This gives the asset more time to grow and weather any short-term headwinds.
  • Active management: Many alternative assets are carefully managed by professional investors who work to generate alpha.

3. Generally lower volatility

Private markets tend to be significantly less volatile than public stocks and bonds. This is due, in part, to the non-publicly traded nature of these investments, making them less impacted by day-to-day market noise. 

4. Downturn protection

Private markets have historically outperformed public stocks in every major downturn of the past 15 years.9

5. Multiple forms of return

Private market investments offer various forms of returns that match a range of goals: 

  • Debt investments typically provide regular interest payments, often quarterly or monthly.
  • Equity investments often pay appreciation at the investment’s maturity — and sometimes regular income as well. 

How private markets fit in your portfolio

While each portfolio is unique, top investment managers like KKR recommend allocating up to 30% of your portfolio to private market alternatives.  

9. As of 1/26/2023. The chart represents the largest quarterly drawdowns in the S&P 500 since 1/1/2008. “Private markets” represents an equally weighted (33.3%) blended index across Private Real Estate, Private Equity and Private Credit. Private Real Estate consists of the NCREIF Property Index (33.3%), Private Equity consists of the Preqin Private Equity index (33.3%), and Private Credit consists of the Preqin Private Debt Index (16.65%) and Cliffwater Direct Lending Index (16.65%). Past performance is not indicative of future results. It is not possible to invest directly in an index of private market assets. Unless otherwise noted, financial indices assume reinvestment of dividends. All indices are unmanaged.

Diversification does not ensure a profit or protect against a loss in a declining market.