What you should know:
- While the terms “private markets” and “private equity” are often used interchangeably, they are different.
- Investments in the private markets include many alternative assets, such as private equity, private credit and private real estate to name a few.
- Private market investments have different risk / reward tradeoffs than their public market equivalents (PMEs).
Why Are Investors Interested in Private Markets?
Beyond public market investments such as stocks and bonds, there exist alternative investment opportunities to which certain private investors have access. This non-public arena is known as the private markets. While often used interchangeably with the term “private equity” (PE), which is the investment of capital in a private company, the term private markets refers to something different. In fact, “private markets” is an umbrella term for private market investments, which include PE, and extend to other alternative investments, such as private credit or private real estate.
Some investors are interested in the private markets because they offer a different risk / return profile than investing in the public markets. Historically, private markets were exclusively accessible to institutional investors, large entities such as pensions, hedge funds and insurance companies, and ultra-high-net-worth (UHNW) investors, people with at least $30 million in private wealth. More recent fund structure developments, such as open-ended or evergreen funds, have created new investment opportunities for a broader range of investors. This extended investor class now includes high-net-worth (HNW) investors, who have at least $1 million in investable financial assets, excluding personal assets such as a primary residence in the U.S., and investors with an annual income of £100,000+ or more or net assets of £250,000+, excluding their primary residence and any annuities in the U.K. To help investors understand the broad opportunity set within the alternative asset class, we share a brief overview of private market investment types below.
What Are the Different Types of Private Market Investments?
Private markets use different types of investment strategies to create potential profits, and each private investment is unique (e.g., represents a specific private company or fund). While this list is not exhaustive, here is an overview of six common private investment strategies.
| Private Investment Strategy | Private Investment Description |
| Buyout | This strategy focuses on acquiring controlling stakes in established companies with stable returns and cash flow. Buyout managers look to add value typically by improving revenue growth, optimizing costs and efficiency, making leadership changes and/or using leverage. |
| Venture/Growth Equity | This strategy focuses on financing seed, early and late-stage startups, as well as emerging companies or a combination of multiple investment stages of startups. These businesses generally are not profitable at the time of investment. |
| Private Credit | This strategy focuses on providing debt capital to a variety of companies. It can involve several different sub-strategies such as distressed debt, mezzanine debt, real estate debt, royalty debt, senior debt, special situations and turnaround time. |
| Real Assets | This strategy focuses on any private market fund with an infrastructure, natural resources, or real estate strategy. Real assets include tangible assets whose value is derived from their utility. |
| Secondaries | This strategy purchases existing stakes in private funds on the secondary market (where previously issued financial products are bought and sold). |
| Direct Investments | This strategy focuses on the purchase of existing stakes in private equity companies on the secondary market. Direct investments may include institutional investments or co-investments in deals originated by a private equity fund. |
As you can see, investing in private markets is nuanced and requires practiced due diligence as well as attentive active management on behalf of the PE firms and GPs that fund these investment strategies. These supervisory functions can ’make or break’ private market investments, such as buyouts and venture capital or growth equity, and are critical to realizing investment goals. Prospective investors should consider both the risks and rewards of allocating capital to alternative investments.
What Are the Risks and Rewards of Private Market Investments?
Investing in private markets has the potential to benefit investors in a number of ways, such as accessing a broader range of investable assets or diversifying portfolios that concentrate on public assets. Additionally, private markets have a long track record of outperforming public markets.
Our data suggest that private markets have consistently outperformed global public equity and credit markets, respectively, in 21 of the last 22 years – even after all management fees, expenses and performance fees are included.1 However, accompanying this increased access and outperformance potential are risks that investors should consider before allocating capital to the alternative asset class.
For example, private market investments such as private credit, venture capital or secondaries have the potential to generate higher returns than their public market equivalents' (PMEs) but also come with more risks, such as committed capital getting locked up for a longer period of time. To help you understand some of the tradeoffs, here is a risk profile associated with private credit.
In this chart, we see how different types of private credit investments perform and their volatility risk on an annualized return basis. This comparison gives us a frame of reference for evaluating risk and we see that private credit risk is lower than the risk for other private market investments. Prospective private market investors may also want to consider other variables, including how their target risk / reward profile for one asset type complements – or contrasts with – the rest of the assets in their portfolio.
This table summarized key variable that investors may want to consider:
| Private Investment Strategy | Private Investment Risks | Private Investment Rewards |
| Buyout |
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| Venture/Growth Equity |
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| Private Credit |
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| Real Assets |
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| Secondaries |
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| Direct Investments |
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How Do Private Market Investments Fit into a Portfolio?
The investable universe of approximately 149,000 private companies worldwide with $100 million or more in annual revenue presents private market investors with a broad opportunity set, especially when compared to the public markets where 27,000 companies with the same revenue are listed.2 This enhanced ability to carefully choose – and not settle on – private investments provides investors with added flexibility and the potential to meet their long-term portfolio objectives. Furthermore, investments in the private markets may provide access to verticals that are often underrepresented in the public markets, and lead to a more diversified portfolio overall. So, when considering private market investments, it’s important to explore both the strategies that fit your risk / reward profile, such as buyouts, real assets or growth equity, and the particular funds in which you want to invest.
1. Source: Hamilton Lane Data via Cobalt, Bloomberg (November 2023)
2. Source: Hamilton Lane Data via Cobalt, Capital IQ (September 2023)
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The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.