Asset Allocation with Private Markets

While adoption of private markets in private wealth portfolios has been on the rise, many individual investors today have no allocation to private investments, ^{[ 1 ]} and are therefore missing what we believe to be a significant opportunity to build wealth. ^{[ 2 ]} The reality is, meaningful private markets allocations for individual investors to asset classes such as private equity, real estate, private credit, and infrastructure have the potential to benefit returns, income and diversification sitting alongside stocks and bonds. ^{[ 3 ]}

With the power of compounding, over the long run, these enhancements can be significant. We already know that family offices and institutions such as college endowments have had success allocating 20%, 30% or more of their portfolios to private markets for decades. Studies have shown, for example, that endowments with higher allocations to private markets on average have delivered stronger long-term returns compared to their less generously allocated counterparts. ^{[ 4 ]}

So why not eligible individuals, too? Blackstone’s private wealth investment strategy team examined how private asset classes can fit into portfolios built for widely pursued objectives such as growth and income. One of the most striking findings is the range of scenarios in which private markets have delivered better risk-adjusted returns compared to portfolios without these assets. ^{[ 5 ]} Both in recent history and into the past, testing a variety of allocation mixes demonstrated better historical returns and lower volatility of portfolios when private allocations were included. ^{[ 6 ]}

These improvements have played out over time, especially compared to the day-to-day volatility of stocks and bonds. ^{[ 7 ]} This consistency reflects the ability of private markets managers to time entrance and exits by controlling liquidity, ^{[ 8 ]} and effect change on assets away from the whims of public markets. These are significant advantages compared to managers in public markets, where assets periodically are sold at less-than-ideal prices to meet investor redemptions. At other times, managers must buy richly priced assets to put a surge of investor capital to work quickly.  

The tradeoff an investor has historically made to benefit from private markets has been less access to their capital, or “liquidity,” as Wall Street terms it. That is because traditional drawdown funds typically lock up cash for seven to ten years, or in some cases longer. But the rise of so-called perpetual or open-ended funds today brings more nuance to this calculus. These funds offer access to private markets on what are often monthly or quarterly liquidity terms, subject to specified limits.

Further, designed with the needs of individual investors in mind, perpetual funds often require much lower minimum investment amounts and allow for regular follow-on investments into the same fund. The combination of faster deployment of capital, more regular access to liquidity than traditional drawdown funds, ease of purchase and, in many cases, simplified tax reporting has driven a considerable increase in their adoption over the last decade. ^{[ 9 ]}

Behind this rising adoption is a better understanding on the part of advisors that a less liquid investment does not necessarily mean a riskier investment. A conversation around true liquidity needs is step one; it requires an advisor to look across the investor’s entire portfolio. Most investors do not turn over their portfolios for years at a time, which means they may have more room for illiquid, long-term holdings than they initially believe. ^{[ 10 ]} And since illiquidity is the source of much of the staying power and flexibility of private markets managers, a revisiting of these assumptions has the potential to benefit a great many investors.

As is so often the case, education on private investment asset classes, structures and asset allocation is key to opening minds on these topics. To meet this need, Blackstone has invested heavily in educational resources for advisors and their clients. Partnerships with financial advisors and investment professionals are at the heart of these efforts.

Our objective, as always, is to provide access to institutional quality offerings with a best-in-class service experience. We deeply value your partnership and your feedback.  You make us better. Our team stands ready to help your clients build wealth with Blackstone.