Private Markets - Portfolio construction and outlook

Wealth Management and Private Banking

08 June 2023

GrowthManagementMeeting of MindsPortfoliosPrivate MarketProfitabilityWealth Management and Private Banking

Expert: Alex Bozoglou Facilitator: Adam Croutear


  1. Private Markets continue to outperform Public Markets
  2. The growth in Private Markets has been driven by strong performance in the Private Equity and Venture Capital sectors which has, since 2021, seen a large inflow of capital
  3. Access to Private Markets is of increasing importance for investors 


Private Markets are growing at a faster rate than the Public Market and is also showing better profitability on average.

A challenge with Private Markets is that the feedback loop on performance is over such a long-time horizon. With both Public equities and bonds down in the previous year, for the first time the impact of Private Markets within a portfolio was really felt – with alternatives offering both relative performance and reduced volatility.

Private valuations have demonstrated less volatility than public valuations, with only 8% of private companies recording negative EBITDA versus 40% of public companies.

Public companies have reduced by 2.2% pa over the last 10 years, whereas Private companies have increased by 6% pa year on year and it is forecast by 2026 there will be 106,000 Software and Services businesses of which 96-97% will be Private.

Selectivity Matters:
Comparing Private Market fund performance highlights a broad range when comparing median performance to top quartile (~500bps) or even top decile (~1000bps). As such selection of the right GP is critical.

Qualitative over quantitative:
Private Market due diligence is more challenging than Public Market due to the limitations and availability of quantitative data emphasising the importance of qualitative findings when valuing a PM Investment and Fund Managers.

Due to the limited information readily available in Private Markets, the due diligence process differs significantly between Private Markets and Public Markets. Discovery is seen as the main component in Private Market due diligence, with extra emphasis placed on whether there is ‘trust’ in the managers approach and incentives. 

The next evolution of PE is in portfolio synergies:
With an increase in its competitiveness, the evolution of the Private Equity market is the driver of returns

The Private Equity model has evolved over the years as increased competition and more challenging market environments has driven a change in the approach. The next successful Private Equity model over the next 5 years will be to build on the growing trend for operational transformation and driving synergies across GP portfolios, with some managers already starting to do this.

Managers with a strong sector specialism and a focus on long term value are those most likely to be able to deliver the value adding synergies across the portfolios and with it the performance returns.

Value is in duration:
Liquidity has proven to be the biggest hurdle for investors accessing the Private Market asset class, and innovation to create greater liquidity has been a trend in recent times, whereby the real value lies within the duration, e.g., optimality resides in holding out for the duration of the term.

Mechanisms have been explored as a means of bringing forward the liquidity of Private Markets. This includes tactical strategies such as credit and contracting with some of the larger reputable secondary players to help provide liquidity / bring forward DPI. In addition to this Private Markets should be considered as part of the wider portfolio where earlier liquidity can be provided as part of the holistic portfolio requirements.

A critical factor in the process is ensuring client suitability and their ability to tolerate a level of illiquidity within their portfolio. Whilst the perception of Private Markets illiquidity is that an investment is locked up for the duration, Private Markets offers a J-curve cash flow where returns should be seen within the first 2-3 years. Effective construction of a Private Markets portfolio should balance the returns profile and duration with the clients’ liquidity profile.

One size does not fit all:
Private Market portfolios should not be constructed as one size fits all.

The Wealth Management industry has historically opted for a one-size-fits-all solution for Private Market portfolios; however, the fundamental principle should be individuality in each portfolio, which is key for client success.

This involves working closely with the client to tailor to their individual needs, factoring in bespoke risk tolerances, investment goals, and time horizons.

Key takeaways:         

  • A challenge many Wealth Managers face is trying to enable Private Markets portfolio construction through the same approach and framework as for traditional portfolio construction
  • Utilising an approach and risk framework based on the same daily pricing model as other asset classes does not work for Private Markets, and Wealth Managers must provide a clear articulation of the difference from Public Market investments and ensure the client has understanding of the commitment, the limited performance transparency and the challenge of illiquidity
  • Wealth Managers need to consider how to enable Private Market investment within their investment process and whether they have an operating model capable of supporting this.