Over the past decade, private investment has surged from $4 trillion to $14 trillion. Investors, led primarily by institutional capital, put money into private markets in search of differentiated returns and alpha generation. This makes sense, as alternative investments have consistently outperformed global public markets over 10-, 15- and 20-year time horizons.
Now, the investor base is expanding to individuals. Bain estimates that assets under management in individual alternative investments have grown to about $4 trillion and projects potential growth to $12 trillion over the next decade, a rapid expansion. Adding alternatives to a portfolio requires careful consideration, and we believe most people will choose to work with an experienced advisor during the process.
Interested individuals should focus on three major themes in alternative investing: long-term time horizons; sizing investments to amounts that can effectively be shelved; and diversification across portfolios and alternatives. This applies to individuals across different wealth categories as new open-ended funds expand investment opportunities for high net worth investors.
I have been working with ultra-high net worth clients for over 20 years, focusing on growing and preserving their capital through investing in alternative investments. We believe private markets investing can help clients with appropriate risk profiles build diversified investment portfolios. With recent product innovations, the most immediate opportunities will be for investors with higher levels of wealth, but these opportunities are still expanding.
As more companies remain private for longer and longer, portfolios limited to public companies will inevitably miss out on market opportunities. The number of publicly traded companies in the United States has fallen by 43% since 1996, while the number of U.S. private equity (PE)-backed companies has increased fivefold since 2000. company.
This means that individual investors invest only in public markets and to a lesser extent in growth companies in the overall economy. We believe the trend of companies choosing to stay private is expected to continue due to greater control and flexibility, lower regulatory reporting requirements, and better access to capital.
While private markets offer the benefits of broader economic risk, diversification and alpha generation, it’s also important to understand how they differ from public markets.
Private markets require long-term capital commitments. This requires careful selection of investment vehicles and precise allocation sizing. They are also less efficient than public markets. We emphasize the value of hiring managers who maintain consistent strategies and methodologies and have a long-term track record of outperforming the public markets.
Our advice to clients was, and still is, to diversify investments across a variety of alternative asset classes, managers and funds. Over the years, we have built alternative investment portfolios for ultra-high net worth clients who can tolerate illiquidity, typically in the 20-30% range of overall holdings. High-net-worth investors might consider half of that (10-15%) as potential targets.
We recommend that clients of traditional closed-end funds invest through a consistent allocation across multiple strategies over time. The sizes should be similar from year to year. Consistency and perseverance can enhance the diversity of “throwback days.”
The launch of innovative open investment tools has simplified the investment process for investors across different wealth classes. Unlike traditional closed-end approaches involving capital calls and withdrawals, these new instruments require full capital upfront. Open-end funds can have significantly lower minimum investment amounts than traditional closed-end strategies, allowing high-net-worth investors to diversify across fund classes and managers while adding alternative investments.
While they provide a degree of liquidity, individual investors must understand that these instruments are not truly liquid. Under favorable market conditions, when the fund is performing well and attracting additional investment, open-ended products will allow redemptions, typically on a quarterly basis. However, when a large number of investors wish to withdraw their investments at the same time, it should be assumed that sufficient liquidity will not be available and redemptions from the account may not be possible.
Individuals should only commit amounts they can afford and treat these open-end funds as traditional alternative investments—largely illiquid.
Many newer open-end funds do not yet have significant performance records and have not gone through full cycles, but their managers can have long-term track records in other structures and strategies. Investors can judge based on their resources: How strong is their team? What is their competitive advantage?
In private credit, this may be a purchase or prime credit option. In other asset classes, such as private equity, senior executives may be adept at driving organic growth, solving problems and helping the company operate more efficiently.
However, it can be difficult for an individual to judge all this. We recommend they work with a financial advisor who has access to a proven alternative investment manager’s wealth platform. With the ability and resources to monitor multiple managers, they can help investors achieve diversification.
Over time, opportunities for investors at different wealth levels are likely to increase as pension providers look to offer alternatives in plans that naturally have a long-term horizon. As companies remain private longer, investors seek alpha generation, and the emphasis on portfolio diversification continues to grow, access and opportunity for individual investors to access alternative investments will only continue to expand.
