Private markets are an ideal asset class for their benefits in improving risk-adjusted returns and increasing diversification. It has numerous benefits in portfolio construction.
Constant Outperformance
Private markets have historically outperformed public markets. The Cambridge Associates private equity public market equivalent ("CA PE") has outperformed public markets over the past two decades delivering around ~12% annualized return versus the ^6% of the S&P 500. This has persisted even across various time horizons; the last 5-years, 10-years, and 20-years.
Larger Investment Universe
The number of listed companies has decreased significantly in the last two decades. For example, the number of public companies in the US fell from ~8000 to ~4000, with a continuing downwards trend. This has made the task of building public only portfolios considerably more challenging particularly when optimizing for idiosyncratic risk (i.e. risk specific to the company). Many companies today are either choosing to go private, or choosing to stay private longer or indefinitely.
Diversification Benefits
Inclusion of private markets has also been shown to greatly benefit portfolios in addition to increasing returns due to low correlations to traditional asset classes. For example, a standard 70/30 equity-bond portfolio is shown to benefit significantly in terms of risk-return by adding private markets to the mix.
