By Nathalie Krekis, Portfolio Director at Schroders

Over the next few years, individual investors are expected to increase their allocation to private markets, in some cases potentially approaching levels seen by various types of institutional investors. The compelling return history for private market investment is clearly a key motivator for these allocations. Schroders Capital research shows this is the main reason institutional investors enter private markets, and we have no reason to believe individual investors think any differently.

Over the past five years, smaller clients have also been offered more options to invest in private markets thanks to product development, changing regulations and technological advancements. Bain & Company estimates that by 2032, 30% of global assets under management could be allocated to alternatives, with a large chunk in private assets. While private investors currently allocate only up to 5% of their portfolios to private markets, we anticipate that the gap with institutional investors will narrow significantly over time and private markets will become commonplace.

The growing appeal of private markets

Of course, returns aren’t the only reason to use private assets, even if it’s high on the client agenda. Characteristics like stable income and genuine diversification, which have the potential to significantly enhance overall portfolio resilience, add to the appeal.

It is also about the opportunity set. In public markets, there is an increasing concentration of stocks, with more than 30% of the S&P 500 dominated by just a handful of companies, leading to a narrower range of options. In contrast, the number of private companies, and those staying private for longer, continues to grow. Private companies in the US with revenues of $250 million or more now account for 86% of the total. Additionally, the number of public listings in the US has more than halved over the past 20 years compared to the period from 1980 to 1999, highlighting the shift towards private market opportunities.

And it’s not just a matter of numbers. Private companies tend to be more agile and innovative in their operations compared to public companies, and they can access opportunities in sectors where public companies have limited or no reach. For example, the new US tariff policies are likely to affect both public and private companies, particularly those vulnerable to supply chain disruptions. However, private companies tend to be more flexible in restructuring their supply chains to adapt to these changes, potentially avoiding cost increases. Nevertheless, companies heavily impacted may still face higher costs, affecting profitability, and therefore valuations and deals.

Pacing is different

One of the key differences with private asset investment is in the pacing of capital deployment. With no immediate secondary market to provide liquidity, allocations can and should be structured to, in a sense, create their own liquidity. Structured correctly, private asset allocations can become “self-sustaining” over time, with distributions and income funding new investments to maintain a target allocation. What does that mean in practice?

Many fund managers, or general partners (GPs), raise capital every year in what are known as “vintages”. The investment phase is when the capital is put to work, typically over a period of about 3-5 years depending on which part of the private assets market it’s in, and what the market backdrop is like. The harvesting phase is when the invested assets are exited, generating capital that can be distributed back to investors. This is typically around 5-7 years after the investment is first made in what is known as an “exit”.

Private equity managers will use the term “exits” because, while selling an asset is an option, it’s only one of many options available. The routes to exit are varied but most commonly the company is either floated in an IPO (initial public offering), sold to another corporate buyer or private equity investor, or sold into a continuation vehicle. In private debt, the fund managers (there is often a cohort of lenders) will structure lending in such a way that the capital is returned at the end of a defined timeframe, having received the cashflows. These cashflows can then be used to refinance (‘re-up’ is a term often used) subsequent vintages.

Vintage years, consistent deployment and the impact on returns

A vintage year allocation approach has the benefit of mitigating the risk associated with market timing. Despite our optimism for the mid- to long-term outlook for private assets, the near term is undoubtedly going to be challenging for many investors. , and keeping up a steady investment pace may be difficult.

While exit and fundraising activity seemed to have bottomed out in 2024 following a prolonged slowdown since 2022, risks and uncertainty in markets have increased sharply since the start of the year. As we pointed out above, this is mainly due to the uncertainties caused by the US government policy changes and the impacts these may have on economies and markets.

A recent analysis from Schroders Capital shows that private equity consistently outperformed listed markets during the largest market crises of the past 25 years. For example, our analysis shows that the average internal rate of return (“IRR”) of private equity funds raised in a recession year has been higher than for funds raised in the years in the run up to a recession – which, at the time, probably felt like much happier times. For private debt and real estate, there are similar effects. For infrastructure, the effects should also show a similar pattern, however longer-term data is limited in this part of the asset class.

Pacing illustration for an investor

Appropriate allocations to private assets will, of course, vary by client and will always be led by overall suitability. Important factors such as a client’s overall income and expenditure, time horizon, investment understanding/experience, appetite for borrowing and ability to tolerate illiquidity are all factors we consider when deciding on the exposure to private assets.

For the sake of illustration though, let us assume all individual clients fall within one of four risk brackets: cautious, balanced, growth and aggressive. For a client on a growth risk mandate (this would mean a typical exposure to equities of between 50-80%) who has a good understanding of investments – a target allocation of 20% might be appropriate across private debt, private equity and real estate.

It’s important to note that the nature of investing in private assets means that allocations should be built up over time to ensure vintage diversification, and that we explicitly recommend diversification by investment and vintage. While we want to diversify by asset class, we also suggest spreading investments across a range of structures.

This usually depends on the investable assets and the investor's ability to accept illiquidity, noting that private investors could benefit from different structure types. For example, clients with large investable asset bases and that have the ability to lock up their money for 10 years plus, can use the traditional routes, such as closed-ended structures. Otherwise, clients with lower minimum entry points and with an uncertain time horizon are able to use “evergreen” open-ended funds: these funds do not have a pre-determined lifespan and can run in perpetuity, recycling investment proceeds and raising new capital as required. While clients investing in evergreen funds are able to access their money periodically, they need to understand these are still long-term commitments and that there are established limits and rules on when and how much they can withdraw.

It’s important that investors be educated and prepared for their allocation to be left untouched for an extended period. Private equity funds typically run for at least seven years, during which time the allocation will not be liquid. The realisation of the assets will also take several years, tapering down in the same way the allocation is gradually ramped up. This is why a complete, ongoing understanding of a client's overall financial position is crucial when considering building a private assets allocation.

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