Over the past decade, private equity has moved from the exclusive domain of big-money investors to become a mainstream asset class. It has historically outperformed public equities and with lower volatility. An allocation to private equity also complements public market holdings by providing further diversification.

Benefits of private equity

The growing importance of private equity can’t be overlooked. It has become essential for portfolio diversification and enhanced growth potential, especially in the current market environment where traditional assets face challenges. Increasingly, institutional investors such as pension funds, endowments, and foundations are adopting private equity to complement their public market holdings. As interest continues to grow, understanding private equity's evolving landscape and identifying capable managers becomes critical for achieving optimal investment outcomes.

Private equity has historically outperformed public equities, generating mid-teen annual returns, with lower volatility. This reduced volatility is partly because private equity assets are valued quarterly – unlike public equities that undergo frequent price changes – making private equity a more stable option, especially in down markets. Moreover, the private equity market is extensive; it includes over 97% of companies with annual revenues above $10 million, most of which are privately held and inaccessible via public markets. Thus, private equity offers investors exposure to a broader array of companies and provides diversification beyond traditional asset classes.

Understanding liquidity in portfolios

One of the main differences between private and public market investing is liquidity. Unlike public equities, private equity investments are not easily sold or traded. As a result, investors must often commit their capital for a longer period, typically five to ten years. However, this illiquidity is often compensated with a higher expected return, known as the "illiquidity premium." And there are certainly benefits to having a small allocation in a diversified equity portfolio where there are other sources of liquidity.

Private equity funds are usually structured as closed-end funds, raising capital during an initial fundraising period and investing it over time. Liquidity is achieved gradually as companies are sold at a profit and capital is returned to investors. For investors with a longer time horizon, this can be an attractive trade-off.