In the previous decade, the realm of private investments witnessed a phenomenal increase, skyrocketing from a valuation of $4 trillion to an impressive $14 trillion. This surge was primarily driven by institutional investors, all vying for assets yielding differentiated returns and opportunities for alpha generation. This pivot toward private markets is not unfounded; empirical evidence demonstrates that alternative investments have consistently outperformed public markets over not just short durations, but even over substantial time horizons spanning 10, 15, and 20 years.
Interestingly, this trend is now permeating down to individual investors, heralding a new phase in the investment landscape. Bain & Company estimates that assets under management in alternatives from individual investors have ballooned to approximately $4 trillion, with aspirational growth projected to $12 trillion within the next ten years. This swift evolution invites individuals to consider carefully how to integrate alternatives into their portfolios.
Challenges of Incorporating Alternatives
While the appeal of private market investments is evident, especially with their historical resilience in outperforming traditional public equities, the introduction of alternatives into individual portfolios necessitates deliberate planning. Most individuals are likely to benefit from partnering with experienced financial advisors during this transition, as the intricacies associated with alternative investments can be complex.
Three overarching themes should dominate discussions around alternative investing for individuals: the importance of a long-term investment horizon, judicious sizing of investments that can comfortably be segregated, and the need for diversification—not just across an entire portfolio, but specifically within alternative investments themselves.
This multipronged approach is pertinent for investors of all wealth tiers, particularly as new open-end funds emerge, facilitating enhanced accessibility for high-net-worth individuals.
In my two decades of experience working with ultra-high-net-worth clients, the narrative has remained quite stark: private market investments can serve as a powerful lever for clients with the appropriate risk profiles in building a diversified portfolio. The escalating trend of companies electing to remain private longer poses a significant risk for portfolios heavily skewed toward public entities, thus potentially missing out on lucrative market opportunities.
Since 1996, the number of publicly traded companies in the U.S. has plummeted by nearly 43%, while private equity-backed companies have quintupled in count since 2000. Today, fewer than 15% of firms generating over $100 million in revenue are publicly listed. This stark disparity highlights how individuals exclusively investing in public markets face a constricted view of burgeoning businesses in the economy.
Companies are increasingly finding the advantages of staying private compelling: greater control and flexibility, diminished regulatory burdens, and improved access to capital are just a few reasons steering them away from the public eye. For individual investors, recognizing and adapting to this trend is crucial as it signifies a broader economic exposure, diversification benefits, and avenues for alpha generation.
However, engaging with private markets requires savvy and a comprehension of their nature, particularly concerning capital commitments. Potential investors need to navigate the less-efficient terrain of private investments, focusing on management teams that display consistent strategies and a historical track record of outperforming public markets over extended periods.
Advisors often recommend spreading investments across various alternative asset classes, managers, and funds. This diversification strategy is vital; it has been a longstanding practice within our firm to build robust alternative portfolios for our ultra-high-net-worth clients, who often allocate around 20-30% of their holdings to illiquid assets. For high-net-worth individuals, a target of 10-15% might be prudent as they become more accustomed to the landscape.
With the advent of innovative open-end investment structures, the approach to alternative investing is evolving. These vehicles offer investors simplified terms—requiring full capital upfront and often presenting much lower minimum investments compared to traditional closed-end structures. While liquidity is inherently limited, understanding the terms associated with these funds is critical for individuals.
The Importance of Evaluation and Support
As these open-end vehicles gain traction, it is essential that investors maintain realistic expectations regarding liquidity. Although redemptions may be permitted quarterly in favorable market conditions, an influx of simultaneous withdrawal requests could hinder full liquidity, necessitating a mindset that anticipates holding investments long-term.
Despite the enticing opportunities, newer funds often lack extensive performance history across complete market cycles. Hence, it becomes imperative for individual investors to assess the strength and capabilities of fund managers, examining their unique competitive advantages, whether that be in private credit or private equity.
In venturing into today’s landscape of alternative investments, collaboration with financial advisors who possess access to expansive resources and proven alternative managers is advised. Such partnerships can facilitate diversification and bolster investment strategies.
Continued diversification of opportunities tailored to varying wealth levels could further expand as retirement systems increasingly recognize the value of incorporating alternatives into their offerings. As the trend persists for companies to remain private longer and the demand for alpha generation escalates, the individual investor’s engagement with alternative investments will likely follow this trajectory of growth—opening doors to unique opportunities in an evolving financial landscape.