As access into private market investments evolves, there are fewer excuses for wealth managers not to consider their place in clients' portfolios, the author of this guest article says.

Wealth managers will now be familiar with the arguments for why they should give clients exposure – within certain risk and liquidity constraints – to private market investments such as private credit and equity, for example. What remains less understood, perhaps, is a complex landscape of how these investments work, and how to access them. As part of our continued examination of investment issues in September, here is a guest analysis by Joseph DaGrosa, Jr, (pictured) chairman and CEO of Axxes Capital, which is based in Coral Gables, Florida. The editors are pleased to share these views; the usual disclaimers apply. Email tom.burroughes@wealthbriefing.com if you want to respond.

Over the past 12 months, you’ve no doubt become aware of the push to provide private market assets to a broader range of investors – maybe you’ve read articles, discussed it at conferences, explored the asset class yourself, or have even had clients ask you about the potential opportunities in private investments and how they could fit into their portfolios. 
 
In speaking with several RIAs, and as a former financial advisor myself, I understand the challenges you may be facing when considering this or any new asset class and, more importantly, explaining new opportunities to your clients. Here’s what you need to know to have a better understanding of private market allocations, have those discussions with your clients and potentially take the next step in allocating to private market investments. 
 
Why private markets? Why now?  
What is your biggest concern when it comes to advising your clients? It’s a question I often asked myself as a financial advisor, and still routinely ask my RIA colleagues. While there are the usual fears – selling or buying at the wrong time, missing opportunities, etc – the issue that comes up most often is ensuring that clients’ assets outlast their lifespan, a significant concern as the average 50-year-old today will likely live three years longer than their counterpart of thirty years ago.   
 
Quite simply, private investments can help solve this issue. They are not just a new opportunity for a bit of extra alpha but can instead mitigate the risk of outliving assets by enhancing returns, providing more diversification and lowering volatility versus a traditional public market portfolio. Private assets represent a sizable investible market, with assets under management totaling an estimated $16.3 trillion in 2023. That pool has grown nearly 20 per cent per annum since 2018 and is expected to reach $24.5 trillion by 2028.  
 
These opportunities are well understood by leading institutions, private foundations and ultra wealthy investors. For long-term and patient investors, there is considerable return potential in the private sector, as well as significant benefits to further diversification away from public markets, especially during selloffs or corrections.
 
Moreover, there is a concern that the return on public equities will not be as strong in the future as in the past. According to FactSet, the S&P 500 forward PE [price-to-earnings] multiple has risen from nearly 10x in 2009 to over 20x in 2024. Assuming that earnings growth over the next 15 years is similar to the past 15 years, the multiple would have to rise to almost 40x for the S&P 500 to repeat its performance, assuming similar earnings growth. This is highly unlikely and therefore suggests that one should consider a new approach to investment allocation. If public market multiples remain steady or contract in the future, returns could be up to 50 per cent lower than previous levels.  
 
Some may claim that private investments may have reached their peak and therefore have no place in a traditional portfolio. However, what this argument is missing is that the private market, like the public, is not a monolith. Private market strategies offer tremendous breadth across strategies including private equity growth/expansion, buyouts, venture capital (including pre revenue, post revenue and pre-IPOs), private debt, real estate, infrastructure and others. Given the scope, scale and variety across investment styles, these strategies offer tremendous diversification benefits versus traditional equity markets.  
 
Addressing client concerns  
Of course, even if private market investments may benefit clients over the long-term, they nonetheless may be reluctant to engage due to the traditional perception of the sector – that it is difficult to access, illiquid and the exclusive purview of the ultra rich.  
 
However, these concerns are often due to a lack of knowledge on the breadth of private market opportunities, the role they play in a diversified portfolio, the important contribution they can make in mitigating the risk of outliving assets and the increasing the ability to easily gain access to private investments. I have found that the following information can help put clients' concerns at ease: 
 
1)  Significant opportunity set – The size of the private markets is often misunderstood. According to Capital IQ, there are 7x more US private companies than public companies with annual revenues of $100 million-plus, all of which depend on investible private market solutions. Moreover, companies are staying private twice as long as they did two decades ago, meaning that more high-quality firms are inaccessible through public equity and debt.  
 
2)  Extensive investment options – Like the public markets, which are made up of various financial instruments and approaches, so too are the private markets. Large private equity deals and venture capital raising in Silicon Valley may get the headlines, but they are only a component of what’s available. Private equity, private debt and venture capital can each play a role in a portfolio, and like the mix of stocks and bonds, so too should private allocations be diversified based on client objectives, comfort level and knowledge. While each client is different, depending on their age, portfolio size and risk tolerance, a good starting point is around 10 per cent to 20 per cent in private markets with allocations across equity credit and real estate.  
 
3)  Benefits of further diversification – Private equity strategies offer different risk-return profiles and varying correlations versus public securities. Lower correlations can offset risk within a traditional equity portfolio. For example, per Capital IQ correlations between the S&P 500 and the Russell 2000 small cap index, mid-cap and Nasdaq stocks usually run near 0.9 (1.0 being a perfect correlation), meaning that prices move up and down together very closely and very often. As a result, investor diversification often reduces risk offset. By comparison, private equity strategies correlate around 0.75, venture capital near 0.5 and secondaries near 0.25 when compared with the S&P 500, thereby offering significantly lower correlation and therefore better diversification benefits when added to traditional public market equity portfolios.  
 
4)  Long-term focus – Private investors are strategic long-term investors and, most frequently, bring significant industry, product and executive expertise to bear on portfolio companies. Unlike public markets, private investors are not exposed to momentum, algorithmic investing, meme stock runs, short-term traders or hedge fund strategies that are based on non-fundamental, short-term considerations. Private investors are also unencumbered by passive index investors that are purposely unaware of stock-specific or idiosyncratic considerations.   
 
5)  Client suitability – To be fair, not all clients will benefit outright from private investments, especially if they are older. But considering expected longer life spans and the role private investments can play over the longer term, those clients with a potential remaining lifespan of 20 years or more could see considerable advantages with some allocation to private investments. Moreover, younger generations, who are seeing the greatest wealth transfer in history, may not only be best suited for additional private exposure but are in fact more open to the possibilities. A recent Bank of America survey found that investors aged 21 to 42 versus their age 43+ counterparts are more likely to: 1) “Agree or strongly agree that it’s not possible to achieve above-average returns solely with traditional stocks and bonds” and 2) “Say private equity is an investment that offers the greatest opportunity for growth.” 
 
6)  Evolving access – New products and services are removing the barriers for accredited investors to participate in the private markets. Once only available to large institutions or the ultra wealthy, private investments are now available through a range of financial vehicles that have low investment minimums, ticker symbols with daily subscriptions, daily net asset value, and quarterly redemptions. And when tax time comes around, new products offer simplified 1099 reporting, greatly improving efficiency for investors, advisors and tax preparers. However, perhaps the greatest innovation is the potential elimination of subscription documents for certain types of registered private investment vehicles (ex: interval funds). This will undoubtedly make it much easier for financial advisors to reallocate into private investments for those of their clients for which it is suitable.  
 
While private investments come with their own set of risks, the real risk for financial advisors may lie in overlooking opportunities that could significantly enhance client portfolios. By grasping the value of private assets and effectively communicating their advantages, advisors can help clients achieve a well-diversified and resilient portfolio that stands the test of time.