The art of optimising private market allocations

Why private markets make sense

The opportunity set is genuinely large. Today, 87% of US companies with revenues over $100 million are privately owned, which means investors that stick only to listed shares are effectively ignoring most of the investment universe.

Beyond access, private markets offer three key benefits:

• Better long-term returns – over 20 years, private equity has outperformed listed shares by around 5% per year after fees
• Genuine diversification – private assets often move independently of share markets, which can reduce the overall volatility of your portfolio
• Active value creation – unlike simply buying shares in a company, private equity managers actively work to improve the businesses they own

 Ten considerations with private market assets

No investment is perfect, and private markets come with real trade-offs that are worth understanding. Here are ten challenges every investor should be aware of, and how they can be managed.

1. Unrealistic expectations. Marketing materials often showcase the best-case numbers. In reality, fees, costs, and timing can significantly reduce what an investor actually receives.
2. Complexity and compliance. Private markets investments can involve unfamiliar structures, documentation, and eligibility requirements. Working with an adviser who understands this landscape is essential to navigating it efficiently.
3. Concentration risk. Putting money into a single fund or manager is not true diversification – it’s a concentrated bet. A single bad outcome can have an outsized impact on your portfolio. Broad diversification across asset types, managers, and geographies is essential.
4. Not all managers are equal. The difference in returns between the best and worst private markets managers can exceed 20% per year. Choosing the right manager requires rigorous research, not just reading a brochure. Past performance also doesn’t guarantee future results – a top performer today may not repeat that success next time around.
5. Valuations aren’t always transparent. Unlike listed shares which are priced by the market every second, private assets are typically valued by the fund manager themselves. It’s important to understand how those valuations are calculated, not just accept the reported number at face value.
6.  You can’t always access your money quickly. Private market investments are typically locked up for several years. Even “semi-liquid” funds, which allow periodic withdrawals, can restrict or delay access in difficult market conditions. Your financial plan should never rely on being able to exit at short notice.
7. Fees can add up. Private markets funds tend to charge more than traditional managed funds, and the fee structures can be complex and layered. Understanding the true all-in cost (including management fees, performance fees, and fund expenses) is essential.
8. Portfolios need active attention. What represented a good investment two years ago may not be the right opportunity today. A private markets portfolio isn’t something you can set up and forget – it requires regular review and a willingness to adjust course.
9. Currency exposure. Most private markets opportunities are offshore, meaning your returns can be significantly affected by movements in the Australian dollar. This currency risk is largely unrelated to the quality of the underlying investments and managing it carefully is an important (and often overlooked) part of the equation.
10. No perfect structure exists. Every investment vehicle involves trade-offs. Funds that offer more flexibility tend to deliver slightly lower returns. Specialist funds that target higher returns are harder to access and less flexible. The solution is to blend different structures thoughtfully, rather than searching for a single perfect option.

What good implementation looks like

The investors who do well in private markets tend to follow a disciplined approach:

1. Diversify broadly – across different types of assets (private equity, private credit, infrastructure, property), different managers, and different parts of the world. Putting everything into one fund is not genuine diversification.
2. Size your allocation carefully – private markets should be a considered part of your overall portfolio, complementing other investments rather than dominating them. Illiquid investments should only represent money you genuinely don’t need access to in the near term.
3. Blend different fund structures – evergreen funds work well as a core holding, while more specialised closed-end funds can complement this for specific opportunities.
4. Review regularly – a well-managed private markets portfolio needs ongoing attention, not a set-and-forget approach.
5. Focus on net returns – always evaluate what you’re earning after all fees and costs have been deducted, not the headline gross figures that managers often advertise.   

 The bottom line

Private markets can be a valuable addition to a well-constructed investment portfolio. But the benefits don’t come automatically. They depend on thoughtful implementation, proper diversification, realistic expectations, and ongoing management.

As always, if you have any questions about how private markets fit into your personal financial plan, please don’t hesitate to reach out to your adviser.