Private markets by the numbers

If you’re an advisor who hasn’t heard from clients with questions about alternative investments, chances are you won’t have to wait long for the inquiries to start coming in.

A pair of recent studies suggest investors are becoming both more curious about alternatives like private equity, credit and real estate and more eager to commit some of their money to these vehicles. In a report from September, the research firm Cerulli found that just over 80% of 200 firms surveyed said they think their private offerings help set them apart from rivals. And nearly seven out of 10 said providing access to private markets aided in attracting high net worth clients.

Similarly, the private investment firm Hamilton Lane found that more than 90% of 232 investment advisors it surveyed late last year said they already have clients in private investments. More than half said they’d like to see investors put 10% or more of their portfolio into these sorts of alternatives, and almost all of them said they plan to recommend at least some allocation this year.

Miguel Sosa, the head of market research and strategy at the New York-based alternatives firm BlueRock, said there’s clearly a need for both advisors and their clients to learn more about private markets.

“In our view, every single investor, whether they invest in alternatives or not, should take an active role in the money that they are investing either directly or through an advisor,” he said. “And educating themselves is in their best interest. So yes, absolutely, there should be more investor education, whether it’s in alternatives or whether it’s in stocks.” 

With interest in private markets running hot, here are some other numbers to ponder as you consider what’s best for your clients.

Private market AUM

McKinsey has found that the amount of money in private markets has rocketed upward in recent years. Assets under management by private funds have gone from $3.8 trillion in 2014 to $13.1 trillion this year, according to the consulting giant. McKinsey predicts the figure will keep rising quickly, almost tripling again to hit $30.4 trillion by 2034.

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Why advisors like alts

Cerulli’s study suggests the main reason advisors recommend private investments to clients is to further diversify their portfolios. Nearly four out of five respondents to its survey cited diversification as their No. 1 goal with alternatives.

The second most common response — named by 57% of the survey takers — was the related objective of mitigating downside risks and dampening volatility. Only 45% of respondents named returns and investment growth as their top goal with private markets.

Hamilton Lane’s survey found similar reasons for turning to private markets. Roughly the same proportion of respondents to its survey — just over 40% — cited both diversification and investment performance as their top goals with alternatives.

Benefits to diversification

Still another recent study — this one by JPMorgan — compared the performance over time of different hypothetical portfolios made up of various mixtures of stocks, bonds and private investments. The standard 60-40 portfolio — consisting three-fifths of stocks and two-fifths of bonds — produced a healthy 8.5% return from the start of 1990 to the end of 2023.

But an allocation of 40% in stocks, 30% in bonds and 30% in alternatives returned 9% over the same period. Upping the equity proportion to half the portfolio while reducing bonds to 20% produced even better results — a 9.5% yield.

Of course, the huge caveat in all of this is that some of those gains will have to go toward covering the higher fees that often come with private investments. Even for investors who can afford to have their money tied up for years in often illiquid vehicles, there’s always the question of whether their returns justify what it costs to get into these opportunities in the first place.

Most popular alts

The most common private investments are alternative mutual and exchange-traded funds that make it relatively easy for investors to pull their money out, according to Cerulli’s report. Nearly 55% of the survey respondents said they plan to increase their clients’ allocations to ETFs holding private investments this year.

The second-most popular private investment on Cerulli’s list was private equity; half the respondents said they want to see more money put into it this year. Then came private debt — 40% of the respondents said they’d like to move more into this part of the market this year.

Hamilton Lane’s survey found that 90% of its respondents would like to increase their clients’ allocation to private equity, 87% to private credit and just over 50% to private real estate.

Standing out with alts

When asked why they recommend private investments, the majority of respondents to Cerruli’s study — 81% — said they agree with the idea that these vehicles help differentiate their practice. Around two-thirds expressed agreement with statements that it makes them more attractive to high net worth clients, helps them raise assets under management and aids in client retention.