What are private markets – and should you invest in them?

Private Markets - Taking your portfolio to the next level

Your portfolio seems solid enough – a huge chunk in tech stocks, a bit of crypto, and some cash tucked away for future opportunities. But as your net worth grows, you can’t help but wonder if your portfolio should be delivering more to keep up with your evolving needs and desires. And rather than loading up on tech and crypto, which often come with higher risks, is there a safer way to enhance your returns?

Traditional investments no longer cutting it?

Welcome to the club. According to a Bank of America survey, 72% of wealthy millennial investors in the US no longer believe it’s possible to generate above average returns by just investing in stocks and bonds¹. Historically, public US stocks have returned an average of 10% per year while public US bonds delivered 5% average annual returns². These returns, while decent, don’t appeal to wealthy young investors anymore, with 93% saying they plan to invest more in alternatives (i.e private market investments) over the next few years to amplify their wealth¹.

But what are private markets and is investing in them a good idea? Let’s find out.

What are private markets?

Private markets refer to investment opportunities not traded on a public exchange. The most common types include:

• Private equity: Private equity is a type of investment that involves buying equity ownership in companies that aren't listed on the public stock market. Specialist Fund Managers have access to unique opportunities that individual investors typically can't reach—like buying into high-potential growth opportunities, restructuring underperforming businesses, or acquiring well-established companies.

• Private credit: Private credit refers to privately negotiated loans between a borrower and a non-bank lender, like a Fund Manager. Due to interest payments from the borrower, investors in private credit can benefit from a steady stream of income while diversifying their portfolios beyond stocks and bonds.

• Private real estate: Private real estate investing typically focuses on commercial, income-generating properties like offices, apartments, retail, and industrial spaces.

Investing directly in private companies or assets can be time consuming and requires huge capital outlays. Professionally managed private markets funds can provide a more accessible and time-efficient way to access a diversified pool of these unique assets.

Notably, private market funds have experienced rapid growth over the last few years. Total assets under management (AUM) in private markets have jumped almost 20% per year since 2018 and stood at US$13.1 trillion as of June 2023³.

This demand for private market investments shows no signs of abating. According to Bain & Company, private market AUM is projected to reach US$60 – 65 trillion by 2032⁴.

Why invest in private markets?

Higher returns, lower volatility

Private markets have historically outperformed public markets. Looking at research using US state pension plans over a 21-year period, private equity generated higher average returns of 11% per year, compared to 7% for public stocks⁵.

One reason is that private market investments often have a lock-up period of about five to 10 years, the typical lifecycle of private equity funds. During this period, investors can’t easily exit their investments, thus giving private fund managers the required time and capital to implement their long-term growth plans for a company. This often leads to better returns and is a key factor for private market investments outperforming public markets over time.

Private markets are generally less volatile as well. Unlike public stocks and bonds, which can experience wild swings from day to day, private market investments do not trade daily and are hence less impacted by short-term price movements.

What’s more, the number of publicly traded companies in the US has sunk in recent years. More than 6,500 companies went public from 1980 to 2000, but just around 2600 companies did so from 2001 to 2023, a whopping 59% decline⁶. By investing solely in the public markets, you’d be missing out on the vast opportunity set in private markets.

How private markets fit into your portfolio

While public investments offer higher liquidity and more immediate returns, private investments offer higher long-term return potential and access to unique investment opportunities not found in public markets.

Furthermore, private market investments have historically shown low correlation to public stocks and bonds, meaning that if one asset decreases in value, the other tends to increase. By owning both public and private investments, you can further diversify your portfolio and minimize overall portfolio risk.

Depending on your financial goals, private markets also offer multiple forms of return potential, including capital appreciation and income generation. For example, as a private equity investor, you could earn substantial returns if the companies you invest in experience significant growth and are later sold at a higher price. Meanwhile, private credit and real estate investments can provide steady income through regular interest or rental payments. 

Wondering how much to invest in private markets? A survey from global investment firm KKR found that high-net-worth investors typically allocate about 26% of their portfolio to private assets⁷.

Whether you’re looking to maximize yield, or benefit from long term growth, the right asset class can play a critical role in enhancing your portfolio.

How to invest in private markets

The world of private markets used to be reserved for institutional investors. But no longer. Today, accredited investors, such as yourself, can gain access through funds spanning private equity, private credit, and real estate.

If you’re ready to invest in private markets, Arta offers access to world-class private markets funds specially curated by our seasoned investment team. Sign up for your Arta account to view our funds or schedule a call with our investment team to find out more.