Why Add Private Markets to Your Portfolio?

If you've been investing for a while, you've probably heard of the 60/40 portfolio. Sixty percent in stocks for growth. Forty percent in bonds for stability. Rebalance occasionally. Simple, time-tested, boring in the best way.

For decades, it worked. When stocks fell, bonds usually rose, cushioning the blow. You got reasonable returns with manageable volatility.

Then came 2022.

Both stocks and bonds dropped together. The 60/40 portfolio fell 16% in a single year. The diversification that investors relied on simply didn't show up when it mattered most.

This wasn't a one-off glitch. It exposed something institutional investors have understood for years: the traditional portfolio model has limitations. One of the ways they've dealt with those limitations is by adding private markets.

What's wrong with the traditional approach?

Nothing is "wrong" with stocks and bonds. They're still core building blocks of most portfolios. But relying on them exclusively has some problems.

Stocks and bonds are increasingly correlated. The whole point of the 60/40 split was that stocks and bonds moved differently. When one zigged, the other zagged. But during inflationary periods, both can fall together. We saw this in 2022, and the relationship has been less reliable since.

Public markets are shrinking. The number of listed companies in the US has declined by about 35% over the past few decades. Meanwhile, the number of private companies has grown by 43%. More than 87% of companies with revenues over $100 million are now privately held. If you only invest in public markets, you're fishing in a shrinking pond.

Concentration is increasing. A handful of massive companies now dominate stock indices. Buy an S&P 500 ETF and you're heavily exposed to a few tech giants. That's not the diversification most people think they're getting.

Volatility is uncomfortable. Public markets price assets continuously. Every piece of news, every tweet, every earnings whisper moves prices. For long-term investors, this volatility is mostly noise. But it's hard to ignore when your portfolio swings 5% in a week.

None of this means you should abandon stocks and bonds. It means they might not be enough on their own.

What do institutional investors do differently?

Pension funds, endowments, and sovereign wealth funds have been allocating to private markets for decades. They typically put 10-30% of their portfolios into alternatives like private equity, private credit, real estate, and infrastructure.

Why? Two reasons:

Better returns. Over the past 25 years, private equity has outperformed public markets by more than 500 basis points annually on a net basis. The average US buyout fund has beaten the S&P 500 by at least 3% per year over its life. Private credit offers yields well above what you'd get from traditional bonds.

Lower correlation. Private market assets don't move in lockstep with public markets. They're valued less frequently, traded less often, and driven by different factors. This can smooth out portfolio volatility.

The trade-off is liquidity. You can't sell private investments as easily as public ones. Your money may be locked up for years. For institutions with long time horizons, that's acceptable. For individuals, it requires more careful planning.

The numbers on performance

Let's look at the data, because this is where private markets make their case.

According to Hamilton Lane research, private equity has outperformed public markets in almost every vintage year since 1984. The average buyout fund beat the S&P 500 by at least 20% over the life of the fund.

MSCI data shows that since 2000, private equity has generated a net annualised return of about 13%, compared to 8% for public equities. That's a meaningful gap compounded over time.

Private credit tells a similar story. With yields often 3-5% above comparable public bonds, and lower default rates in asset-backed structures, it offers income that's hard to find elsewhere.

But there's an important caveat: manager selection matters enormously.

The gap between top-quartile and bottom-quartile private market managers is far wider than in public markets. According to BlackRock data, this performance gap ranged from 5 to 13 percentage points between 2013 and 2023. Pick a bad manager and you can significantly underperform. Pick a good one and the results can be excellent.

This isn't like buying an index fund where all providers deliver roughly the same return. In private markets, who manages your money really matters.

Why the outperformance?

Private equity doesn't outperform because of magic. There are actual reasons:

Access to more companies. Private markets include thousands of companies that public investors can't touch. Many high-growth businesses stay private longer now, meaning private investors capture more of the value creation.

Active ownership. Private equity funds don't just buy and hold. They actively work to improve the companies they own. New management, operational changes, strategic pivots. This hands-on approach can create value that passive public market investing can't.

Illiquidity premium. Investors demand higher returns for locking up their money. This "illiquidity premium" is a real source of extra return for those who can afford to be patient.

Less market noise. Private companies aren't priced every second by panicking or euphoric traders. Valuations are based on fundamentals, not sentiment. This can lead to better decision-making and less forced selling at bad times.

Leverage and structuring. Private equity often uses debt to amplify returns. This adds risk, but in skilled hands, it also boosts returns for equity holders.

None of these factors guarantee outperformance. But they do explain why the historical numbers look the way they do.

What about the risks?

I don't want to oversell this. Private markets have real drawbacks.

Illiquidity. Your money can be locked up for 5-10 years in private equity. Even private credit typically has holding periods of 1-3 years or more. If you need cash, you probably can't get it quickly.

Valuation uncertainty. Private investments aren't priced by a market. The values you see in statements are estimates based on models and comparisons. The true value is only known when something is actually sold.

Manager risk. As mentioned, manager selection matters hugely. A bad manager can lose money even when the market is good. Due diligence is essential.

Fees. Private market funds typically charge higher fees than public market alternatives. The standard is often 1.5-2% annually plus 20% of profits. These fees can eat into returns, especially for mediocre managers.

Complexity. Private market investments are harder to understand and evaluate than public stocks or ETFs. There's more to learn and more ways to get it wrong.

Access barriers. Historically, you needed significant wealth to access good private market funds. Minimums of R500,000 to R1 million or more were common. This is changing with tokenisation and new fund structures, but barriers still exist.

The question isn't whether private markets are "better" than public markets. It's whether the benefits outweigh the drawbacks for your specific situation.

How much should you allocate?

It depends on your circumstances. Here are some frameworks people use:

Institutional model: Pension funds and endowments typically allocate 10-30% to alternatives. This has been refined over decades of experience.

Emerging model for individuals: Some advisors suggest a 50/30/20 portfolio. Fifty percent stocks, thirty percent bonds, twenty percent alternatives. This provides meaningful private market exposure while keeping most assets liquid.

Conservative approach: Start with 5-10% in alternatives. See how it feels. Understand what you own. Increase allocation as you get more comfortable.

The "right" number depends on:

• How long can you lock up money?

• How much do you understand about private markets?

• What access do you have to quality funds or investments?

• How important is liquidity to you?

For most individual investors, something in the 10-20% range is probably reasonable as a target. But starting smaller and building up makes sense if you're new to this.

What types of private market investments should you consider?

Private markets aren't one thing. They include several distinct strategies:

Private credit. Lending to businesses, typically with asset backing. Offers regular income, lower volatility than equity, and priority if things go wrong. Good for investors who want yield without stock market exposure. We covered this in detail in our private credit article.

Private equity. Ownership stakes in private companies. Higher potential returns, but higher risk and longer lock-up periods. Suitable for patient investors comfortable with equity risk. See our private equity article.

Real assets and infrastructure. Investments in physical things like property, solar farms, transport equipment. Often provide inflation protection and steady cash flows. We touched on this in our asset-backed finance article.

Venture capital. Early-stage company investing. Very high risk, very high potential returns. Probably not suitable for most retail investors as a core holding.

A diversified private markets allocation might include all of these, weighted according to your risk tolerance and income needs.

How can you actually access private markets?

Historically, individual investors were largely shut out. That's changing.

Tokenised investments. Platforms like Mesh.trade, VALR, and Luno are offering tokenised private market assets with lower minimums. We explained how this works in our tokenisation article.

Listed alternatives. Some private equity firms and real estate trusts are listed on stock exchanges. This gives you exposure through your normal brokerage account, though with different characteristics than direct private market investments.

Retirement funds. If you're invested in a pension fund or retirement annuity, you likely already have some private market exposure. Many institutional investors allocate to alternatives on behalf of members.

Lower-minimum funds. Some fund managers are creating structures specifically for retail investors with lower minimums than traditional private equity funds.

The access problem hasn't been fully solved, but it's much better than it was five years ago.

The bottom line

The traditional 60/40 portfolio was designed for a different market environment. Stocks and bonds are still valuable, but they have limitations, and those limitations have become more visible in recent years.

Institutional investors have responded by allocating 10-30% of their portfolios to private markets. The data suggests this has improved both returns and diversification over time.

For individual investors, private markets are becoming more accessible through tokenisation and new fund structures. The trade-offs are real, particularly around liquidity and manager selection, but so are the potential benefits.

Adding private markets to your portfolio isn't about chasing returns or following a trend. It's about recognising that the investment universe is larger than what's listed on stock exchanges. Most companies are private. Most opportunities are private. A portfolio that ignores that is fishing in a shrinking pond.