Private markets investments not only offer the potential for positive risk-adjusted returns, they also bring differentiated risk-return dynamics that set them apart from their public market equivalents.

When considering allocating to private assets, factors to consider include:

• The size of the portfolio
• Existing asset allocation
• Investor risk tolerance
• Time horizon
• Liquidity and income requirements

Due to the inherent illiquidity of private assets, portfolios with an increased allocation to private markets will have reduced liquidity compared to traditional public market-focused private wealth portfolios. However, through different allocation options they can also be a powerful tool to help private investors reach their investment objectives.

We think there are four ways that incorporating private assets can boost client outcomes. Our suggestions are based on mirroring the 14% average allocation to private markets seen among institutional investors¹ and using different combinations of private asset class exposures.

A tilt to private equity may help boost growth due to the multiple sources of added value available to a private equity manager.

1. Growth and Capital Appreciation

A tilt to private equity may help boost growth due to the multiple sources of added value available to a private equity manager.

For example, significantly overweighting private equity (and within that, strategies such as small and mid-sized buyouts), together with a smaller allocation to infrastructure, private debt, and real estate, can offer the potential for higher and more diversified returns compared to traditional public equities and bonds, thereby enhancing the portfolio’s overall growth potential.

Our analysis below shows that when incorporating this allocation into a traditional multi-asset portfolio of 60% public equity and 40% bonds, there’s a notable increase in return at a marginally higher level of risk, consistent with the objectives of a growth portfolio with capital appreciation as its main goal.

2. Enhance and Diversify Income

If the specific portfolio objective is to generate income, it may be sensible to overweight private debt given the regular coupons and attractive relative risk premiums, alongside the lower loss rates and higher net credit spreads, typically experienced across various types of private debt relative to public credit.

Real estate and infrastructure assets, such as renewables, can also offer secure income traits. These asset types typically show low correlation with traditional asset classes, adding diversification and providing recurring income streams through rent or usage fees.

Private credit can provide attractive risk-adjusted returns compared to traditional fixed income.

3. Capital Preservation

Investing in private credit or infrastructure can be an effective strategy for seeking to preserve capital, so investors should consider incorporating these asset classes if this is a primary objective. For example, private credit investments, such as direct loans to private companies or private debt funds, can provide attractive risk-adjusted returns compared to traditional fixed-income securities without taking on additional credit risk, as noted above.

Real-estate and infrastructure investments are another avenue for capital preservation. Infrastructure assets, in particular, generate steady cash flows through long-term, index-linked contracts or concessions, and their value often appreciates over time, which can contribute to long-term capital preservation.

4. Inflation Protection

Certain private assets can offer the potential for consistent returns that outpace inflation. Renewable energy infrastructure could be a compelling option, as its revenues—and consequently returns—are often directly linked to inflation. This connection is typically supported by government-backed payments, which are typically linked to local inflation rates. This positive correlation with inflation helps preserve the real buying power of a portfolio, making investment more resilient over time.

Real estate, especially properties with stable income streams such as commercial buildings or rental properties, as well as private debt strategies that offer floating-rate structures, can also serve as an effective inflation hedge.

¹ Schroders, Schroders Institutional Investor Study 2022.