Investing in private markets
Taking the long-term view
What are private markets?
Private markets encompass investments that are not traded on public exchanges. They include private equity, which provides capital to companies from early-stage ventures to established businesses; private credit, including direct lending to companies; and real estate and infrastructure. Investors typically gain access through professionally managed funds, with strategies spanning different objectives, investment horizons, and levels of risk.
We believe private markets can play an important role in long-term portfolios for investors willing and able to bear their risks. They broaden access to businesses and assets beyond public markets, offering opportunities for capital growth, income, and diversification. Managers can help create value through operational improvements, business expansion, and active asset management. The potential benefits vary by strategy and are not guaranteed.
Important to understand
Investing requires careful planning. Capital may be committed for many years, opportunities to sell can be limited, and the timing of capital calls and distributions can be uncertain. Other risks include leverage, concentration, potential capital losses, and limited control and transparency over underlying holdings. Valuations are generally less frequent than in public markets and may not reflect achievable sale prices. Thorough due diligence, careful manager selection, and diversification across vintage years, strategies, and geographies can help manage—but cannot eliminate—these risks.
Why invest in private markets?
We believe private markets can play an important role in long-term portfolios for investors willing and able to bear their risks. The case goes beyond seeking higher returns: private investments can widen access to opportunities, diversify sources of return, and support income and growth objectives.
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Access opportunities beyond public markets
Many businesses and assets are not publicly traded, and companies that stay private for longer may generate a substantial part of their growth before listing. Private markets provide access to these opportunities, from emerging businesses to established companies, and from digital infrastructure to assets supporting energy security.
Pursue higher long-term returns
Private equity has historically outperformed public equities over long periods in the research cited below, although results vary considerably by manager, strategy, and investment year. Skilled managers can create value by improving operations, expanding businesses, and negotiating attractive purchase prices and financing terms. Neither an illiquidity premium nor future outperformance is guaranteed.
Broaden portfolio diversification
Private strategies introduce businesses, assets, and sources of return that may be underrepresented in listed markets. Their differing economic drivers can help reduce reliance on a handful of companies, sectors, or themes. Diversification does not eliminate losses, and less frequent valuations should not be confused with lower underlying risk.
Add sources of income
Private credit, real estate, and infrastructure can generate income through lending, rents, and contracted revenues. Some real assets also offer inflation-linked cash flows, depending on their contracts and pricing power. Income reliability varies with borrower quality, asset performance, and financing costs.
Are you looking for more information?
Are you looking for more information?
Do you have follow-up questions on these topics, or are you looking for deeper insights about our views? Contact your advisor directly to continue the conversation.
Private equity
Private equity means investing in companies that are not publicly traded, including listed businesses taken private. Usually accessed through specialist funds, it seeks long-term capital growth by building more valuable businesses and eventually selling them. It broadens access beyond public markets, but involves significant risks and does not guarantee higher returns.
The main strategies
Buyouts — improving established businesses
Managers acquire controlling stakes in established companies, typically using equity and debt. They seek to grow earnings, improve operations, and strengthen businesses. Borrowing can amplify both returns and losses.
Growth equity — helping businesses scale
Managers provide capital to established, fast-growing companies, often through minority stakes. Funding supports expansion into new products or markets. Success depends on delivering growth and paying a reasonable entry price.
Venture capital — backing emerging businesses
Managers finance young companies developing new products, technologies, or business models. Failure rates are high, and a small number of successful investments often drive much of a fund’s returns.
How investors gain exposure
- Primary funds: Commit capital to a fund that builds and manages a portfolio over time.
- Secondaries: Buy existing fund interests or exposure to assets already held in private markets. More mature portfolios may offer greater visibility and earlier distributions, but neither discounts nor shorter holding periods are guaranteed.
- Co-investments: Invest in individual companies alongside a manager, potentially at lower fees but with greater concentration and due-diligence requirements.
How returns are generated
Managers seek to grow revenue, improve profitability, and reduce debt using company cash flows. Returns also depend on purchase and sale valuations. Exits typically involve a sale to another company or investor, or a public listing. Management fees, expenses, and the manager’s share of profits, carried interest, reduce investor returns.
What to expect as an investor
Traditional closed-end funds commonly last ten years or longer. Investors fund commitments gradually through capital calls and receive distributions as investments are realized. Keep sufficient liquidity to meet commitments: distributions are uncertain. Early costs can depress returns before investments mature, known as the J-curve effect, with no assurance of recovery. Evergreen funds may offer periodic withdrawals, but restrictions or suspensions mean they are not liquid substitutes.
What matters when selecting an investment
What matters when selecting an investment
Assess manager experience, debt levels, fees, and alignment with investors. Distinguish cash returned from estimated gains, and compare performance after fees, allowing for fund age and cash-flow timing.
Diversify across managers, strategies, sectors, regions, and investment years. Less frequent valuations can smooth reported returns without reducing underlying risk. Private equity is a long-term growth investment, not a source of dependable income; investors can lose their entire investment.
Direct lending
Direct lending means providing privately negotiated loans to companies, usually through specialist funds rather than banks or public bond markets. Borrowers typically have below-investment-grade credit quality. Unlike private equity, investors are lenders rather than owners: the aim is primarily to earn interest and recover principal, not participate in company growth.
How the loans work
Senior secured
Loans typically rank ahead of junior debt and equity, with claims on specified collateral. These protections can improve recoveries but do not guarantee repayment.
Floating rate
Interest usually combines a reference rate with an additional margin, or spread. Higher rates can increase income but strain borrowers; lower rates generally reduce income.
Privately negotiated
Managers source borrowers, assess repayment capacity, and negotiate terms, including covenants that can trigger intervention if financial conditions deteriorate.
Companies use these loans to finance acquisitions, expansion, or refinancing, often valuing lenders’ flexibility and certainty of execution.
How returns are generated
Returns mainly come from interest, supplemented by lending fees and discounts at origination. Credit losses, valuation changes, fund expenses, and management or performance fees affect what investors ultimately earn. A quoted loan yield is not the same as an investor’s net return. Some loans include payment-in-kind interest, which adds to debt instead of being paid in cash. Fund-level borrowing can amplify both returns and losses.
What to expect as an investor
Closed-end funds generally require multiyear commitments, with capital called over time. Evergreen funds may offer periodic subscriptions and withdrawals, but redemption limits or suspensions can restrict access to money. Direct lending can broaden income sources beyond public bonds, but distributions are not guaranteed. Infrequent valuations can make reported performance appear smoother without reducing underlying credit risk.
What matters when selecting an investment
- Borrower resilience: Cash generation, debt burden, and ability to cover interest payments.
- Loan protection: Repayment priority, collateral quality, and enforceable covenants.
- Income quality: Cash interest versus PIK, and non-accruals.
- Portfolio construction: Sector concentrations, overlapping borrowers, fund leverage, fees, and liquidity terms.
Where distressed debt fits
Distressed debt is a separate private-credit strategy, not another name for direct lending. Managers buy debt of financially troubled companies, often at substantial discounts, seeking gains through recovery or restructuring. Outcomes depend heavily on legal expertise, recovery values, and execution rather than dependable interest payments.
Real estate and infrastructure
Private real estate and infrastructure funds invest in the buildings and essential systems that support everyday life. Both can generate income and long-term capital growth, but returns depend on the assets, financing, and manager’s ability to operate and improve them.
Two ways to invest in real assets
Real estate
Includes residential buildings, offices, shops, and logistics properties. Returns come from rental income and changes in property values. Managers seek to improve returns by attracting tenants, renewing leases, upgrading buildings, and managing costs.
Infrastructure
Includes utilities, transport networks, energy facilities, digital networks, and social assets such as schools and hospitals. Revenues may come from regulated charges, long-term contracts, or usage-based payments.
From income to development
Core / core-plus
Established, operating assets, with returns primarily driven by income. Core-plus adds modest improvements, greater economic exposure, or additional borrowing to seek higher returns.
Value-add
Assets requiring renovation, better occupancy, or expanded services. Returns combine income and potential capital appreciation, but improvements can absorb cash and delay distributions.
Opportunistic
New developments or substantial transformations. Returns rely mainly on capital appreciation, with greater construction, execution, and market risk.
What they can bring to a portfolio
Real assets can broaden sources of income and return beyond traditional stocks and bonds. Leases, regulated tariffs, or contracts that allow price increases may offer some inflation protection, but rising costs, financing expenses, and restrictions on passing costs through can offset that benefit. Private ownership gives managers scope to improve assets over long periods. Success depends on purchase discipline, local expertise, operational execution, and exit timing.
What to expect as an investor
Closed-end funds require multiyear commitments, often with capital called over time. Open-ended funds may offer periodic withdrawals, but limits or suspensions can restrict access to money. Unlike listed property or infrastructure shares, private fund interests generally cannot be readily sold. Less frequent valuations can make reported returns appear smoother without reducing underlying economic risk.
What matters when selecting an investment
- Income quality: Tenant and customer creditworthiness, occupancy, contract duration, and exposure to changing demand.
- Financing: Borrowing levels, interest-rate exposure, and refinancing needs. Debt magnifies both gains and losses.
- Asset-specific risks: Vacancies and refurbishment costs in property; political, regulatory, and commodity-price exposure in infrastructure.
- Manager and fund structure: Local operating expertise, diversification, fees, valuation practices, and liquidity terms.
Understanding the risks
Private markets require a long-term perspective
Private market investments can involve substantial risk, including loss of capital. They are generally less liquid than public investments, may use leverage, and often provide less frequent information and valuations. Cash-flow timing can be uncertain and distributions are not guaranteed.
Illiquidity and long holding periods
Fund interests may be difficult or impossible to sell quickly. Redemption limits or suspensions may apply even in evergreen or open-ended structures.
Leverage and credit risk
Borrowing can magnify gains and losses. In debt strategies, borrowers may fail to meet payment obligations and collateral may not cover losses.
Manager and concentration risk
Results can vary significantly by manager, strategy, sector, region, and vintage. Concentrated portfolios may experience larger losses.
Capital calls and uncertain distributions
Investors must retain sufficient liquidity to meet capital calls. Distributions depend on realizations and may arrive later than expected.
Valuation and transparency
Private assets are valued less frequently. Reported values may differ from achievable sale prices, and investors may have limited visibility into underlying holdings.
Fees and conflicts
Management fees, expenses, performance fees, and carried interest reduce returns. Co-investments and manager-led transactions require careful review of pricing and conflicts.
Risk-management principles
Conduct thorough due diligence. Select experienced managers. Understand fund terms, fees, leverage, valuation practices, and liquidity restrictions. Diversify across managers, strategies, sectors, regions, and vintage years. These measures can help manage risk but cannot eliminate it.