The Rise of Private Markets: Should You Invest Beyond Public Stocks and Bonds?

For decades, the traditional 60/40 portfolio of stocks and bonds served investors well. But as institutional investors and ultra-high-net-worth individuals have increasingly allocated capital to private markets, many investors with substantial portfolios are asking: Should I look beyond public markets?

Private market investments—including private equity, private credit, venture capital, and private real estate—have grown significantly. According to recent industry data, global private market assets under management have expanded considerably over the past decade. But does this growth mean these investments belong in your portfolio?

Understanding Private Markets

Private markets encompass investments in companies or assets not traded on public exchanges. Unlike buying shares of Apple or Microsoft on the Nasdaq, private market investments involve direct ownership stakes in private companies, loans to private borrowers, or investments in non-listed real estate ventures.

These investments come in several forms:

Private Equity involves acquiring ownership stakes in private companies, often with the goal of improving operations and eventually selling at a profit. Investment periods typically range from 7–10 years.

Private Credit includes direct lending to companies that may not access traditional bank financing. These loans often carry higher interest rates to compensate for increased risk and illiquidity.

Venture Capital focuses on early-stage companies with high growth potential. While the success stories make headlines, the reality involves significant risk of total loss.

Private Real Estate encompasses direct property ownership, real estate development projects, and private real estate funds—distinct from publicly traded REITs.

The Appeal: Why Investors Are Looking at Private Markets

The attraction to private markets isn’t without merit. Institutional investors, such as university endowments, have long included these investments in their portfolios.

Potential for Enhanced Returns: Some private market strategies have historically generated returns exceeding public market benchmarks, though past performance doesn’t guarantee future results. The lack of daily price discovery can allow skilled managers to identify mispriced opportunities.

Diversification Benefits: Private investments often behave differently from public stocks and bonds. This low correlation can potentially reduce overall portfolio volatility, though this benefit shouldn’t be overstated.

Access to Different Opportunities: Private markets offer exposure to companies and projects unavailable in public markets. Many successful businesses remain private longer than in previous decades, potentially keeping their highest-growth phases out of public investors’ reach.

Reduced Market Volatility: Without daily pricing, private investments don’t show the same price swings as public securities. However, this “smoothing” effect reflects infrequent valuations rather than true stability.

The Realities: What You Need to Know

Despite the appeal, private markets present significant challenges that make them unsuitable for many investors.

Illiquidity is Real: Private investments typically lock up your capital for years. Unlike selling a stock with a few clicks, exiting private investments before the term ends is difficult and often costly. If you might need access to this capital for emergencies, college expenses, or other goals, illiquidity creates serious risks.

High Minimum Investments: Many private market funds require minimums of $250,000 to $1 million or more. Even with lower minimums now available through some platforms, proper diversification across multiple private investments requires substantial capital.

Limited Transparency: Private companies aren’t subject to the same disclosure requirements as public ones. You’ll receive less frequent reporting and less detailed information about your investments.

Fee Structures: Private market funds typically charge higher fees than public market investments. The common “2 and 20” structure—a 2% annual management fee plus 20% of profits—significantly impacts net returns. Even with lower fee structures becoming more common, costs remain considerably higher than those of index funds.

Regulatory Considerations: Many private market investments are available only to accredited investors (generally those with over $1 million in net worth excluding the primary residence, or income exceeding $200,000 individually or $300,000 jointly). Some investments are limited to qualified purchasers with at least $5 million in investments.

Tax Implications Worth Considering

Private market investments can create complex tax situations. Partnership structures (common in private equity and real estate funds) generate K-1 forms that can delay tax filing and increase preparation costs. Some investments may generate unrelated business taxable income (UBTI), creating potential tax liabilities in IRAs and other retirement accounts.

The Tax Cuts and Jobs Act of 2017 introduced the Qualified Business Income (QBI) deduction under Section 199A, which may benefit certain pass-through income from private investments. This provision was extended under the One Big Beautiful Bill Act, preserving its availability beyond 2025. Always consult with a tax professional about your specific situation.

Is Your Portfolio Ready for Private Markets?

Not everyone with investable assets should invest in private markets. Consider these questions:

Do you have true liquidity elsewhere? Private investments should represent only a portion of a well-diversified portfolio. Most financial planners suggest keeping several years of living expenses in liquid investments before considering illiquid alternatives.

Can you afford to lose the investment? Private markets carry real risks of capital loss. Venture capital investments frequently result in total losses, and even private equity deals can fail.

Do you have the sophistication to evaluate these opportunities? Unlike researching public companies with abundant information, evaluating private investments requires specialized knowledge or trusted advisory relationships.

Does it align with your financial plan? Private markets aren’t a strategy unto themselves—they’re tools that may or may not serve your specific goals and timeline.

A Measured Approach

For high-net-worth investors who are considering private markets, a thoughtful approach is essential.

Start small if you start at all. An allocation of 5–10% of your portfolio allows you to gain experience without overexposing yourself to illiquidity and risk.

Understand what you’re buying. Don’t invest in strategies you don’t understand, regardless of promised returns or the prestige of the sponsor.

Work with experienced advisors. The private markets landscape is complex, with significant variation in quality among managers. Professional guidance can help you avoid costly mistakes.

Remember your core strategy. Private markets should complement, not replace, a sound investment approach built on your goals, timeline, and risk tolerance.

The Bottom Line

Private markets have grown for legitimate reasons, and for some investors with substantial assets, these investments may enhance portfolio diversification and returns. But they’re not a requirement for investment success, and they come with real trade-offs.

Private markets are clearly growing, but do they make sense for your specific financial situation? For many successful investors, a well-constructed portfolio of public stocks and bonds, potentially supplemented with publicly traded real estate and other strategies, continues to provide an effective path toward financial goals.

Before venturing beyond traditional public markets, ensure you understand not just the potential rewards but the very real risks, costs, and constraints these investments entail.

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This content was created with the assistance of artificial intelligence (AI). While efforts have been made to ensure accuracy, the content should be reviewed by a qualified financial advisor before implementation.

The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is for informational purposes only and should not be considered investment, tax, or legal advice.

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Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REITs will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. This is not a recommendation to buy or sell any individual security or any combination of securities.