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In today's volatile political and economic environment, private markets has gained significant traction as an alternative to traditional stocks and bonds.

These investments – such as a solar farm, a hospital, a tech start-up, or an electric micro-mobility vehicle maker – often offer unique benefits that promise stability and growth even in uncertain times.

What are private markets?

Private markets refer to investments that are not traded on public exchanges. They can be split into two main categories:

  • Private capital
    Investing equity in ventures or buyout transactions, as well as lending money to private companies and projects.
  • Listed real assets
    Real estate, infrastructure projects, or natural resources, such as timber or agricultural land.

Unlike public markets, where most securities are bought and sold openly on a near-daily basis, private market investments are typically made over the counter through direct transactions between investors and companies or funds. That’s why they are labelled as private and are often illiquid.

Listed companies represent only a small fraction of the registered companies worldwide, while borrowing from bond markets is typically available only to firms of a certain size.

Investing in private equity and private credit can increase opportunities to enhance portfolio performance. Meanwhile, financial innovation and the needs of private capital have also opened a new set of investment opportunities.

Those structural changes, coupled with higher volatility in public markets, have driven investments in these alternatives. Assets under management rose from $2 trillion in 2003 to $25 trillion in 2023. One estimate predicts that this market will reach $59 trillion by 2033.1

How is investing in private markets changing?

Traditionally, private market investments were the domain of large institutional investors due to high minimum commitments and long-term investment horizons. However, this is changing. Innovations in financial technology and regulatory changes have enabled a broader range of investors to participate.

Additionally, there has been a growing trend toward evergreen funds and semi-liquid pooled investment vehicles that offer investors greater flexibility in terms of commitments and withdrawals compared to traditional private market vehicles. That said, still-sizeable investment requirements and other barriers to entry mean that, for now, wealthier individuals are expected to benefit most from this trend.

Why private markets?

Diversification, reduced correlation

One of the primary advantages of private markets is their ability to provide diversification. Private market assets have a low correlation with traditional equities and bonds (Chart 1).

Chart 1. Public vs. Private markets, correlation

This means they do not necessarily move in tandem with public markets, thereby reducing overall portfolio volatility and improving portfolio resilience. For example, infrastructure assets – such as energy generation and transportation – often have long-term government-backed contracts that provide stable cash flows, even during economic downturns.

Enhanced returns

Private market investments have historically offered higher returns compared to their public market equivalents due to the illiquidity premium – investors are compensated for the lack of liquidity with higher potential returns. Our research has shown that the illiquidity premium can add some 2–4% per year to private equity returns over the long run. Private equity investments in growth companies or buyout transactions can yield substantial returns through strategic management and operational improvements.

Inflation protection, stable cash flows

Certain private market assets, such as infrastructure and real estate, naturally hedge against inflation. These assets often have contracts or leases tied to inflation, ensuring that cash flows increase in line with rising prices. This makes them particularly attractive in periods of high inflation, as they can help preserve purchasing power. Additionally, private credit investments offer stable and predictable cash flows through interest payments, further enhancing portfolio stability.

Access to unique opportunities, value creation

Private markets offer access to unique investment opportunities that are not always available in public markets. This includes investments in niche sectors, emerging markets, and innovative projects. For instance, private equity funds can invest in early-stage companies with high growth potential. In contrast, infrastructure funds can finance critical projects, such as those related to renewable energy and smart cities. These investments not only provide financial returns but may also contribute to social and environmental goals.

Risk management and resilience

Incorporating private markets into an investment portfolio can enhance resilience against market shocks. The dynamic nature of private investments, which often involve active management, allows for strategic value creation. For example, private market managers can implement operational improvements, cost efficiencies, and strategic acquisitions to enhance the value of their investments.

Final thoughts

Amid the shockwaves emanating almost daily from Washington, cracks are emerging in the strength of the US equity market, while global bond markets appear shaky as interest-rate expectations shift. However, private markets stand out as a potential haven for investors seeking to mitigate volatility and achieve long-term returns. While these investments require careful consideration, they also offer benefits that can complement traditional portfolios. Investors should weigh liquidity needs and risk tolerance before committing. But for those with access and patience, private markets may offer a pathway to stability and growth – even in turbulent times.

1 "Avoiding Wipeout: How to Ride the Wave of Private Markets." Bain & Company, August 2024. https://www.bain.com/insights/avoiding-wipeout-how-to-ride-the-wave-of-private-markets/.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Among the risks presented by private equity investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and or governance, investment risks, leverage and tax considerations. Private equity investments can also be affected by environmental conditions / events, political and economic developments, taxes, and other government regulations.

Investments in real estate are highly sensitive to economic conditions and developments and characterized by intense competition and periodic overbuilding.

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Among the risks presented by private equity investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and or governance, investment risks, leverage and tax considerations. Private equity investments can also be affected by environmental conditions / events, political and economic developments, taxes and other government regulations

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