Over the past ten years, the landscape of private investing has transformed dramatically, with total assets skyrocketing from $4 trillion to an astonishing $14 trillion. This phenomenal growth has predominantly been fueled by institutional investors eager to tap into differentiated returns and the potential for alpha generation found within private markets. The consistent outperformance of alternative investments compared to public markets over extensive time horizons—including 10, 15, and even 20 years—has made these avenues increasingly appealing. What was once an exclusive domain of institutional investors is now gradually opening up to individual investors, marking a significant shift in investment dynamics.
Bain & Company projects that individual investment in alternatives could reach around $12 trillion within the next decade, establishing a substantial growth trajectory that demands careful attention. As more individuals look to diversify their wealth and seek better returns, it becomes critical for them to comprehend the nuances of alternative investments. They must not only assess their risk appetites but also consult with experienced advisors to navigate these complex markets effectively.
Investing in alternative assets is fundamentally different from traditional public market investments. Prospective investors must weigh three essential themes: the requirement for long-term commitment, the precise sizing of investments, and the necessity for diversification across their portfolios—both overall and within specific alternative asset classes. This need for intentionality applies across varying wealth levels, as new open-end funds increasingly become available to high-net-worth individuals.
For over two decades, my work has primarily revolved around assisting ultra-high-net-worth clients in both growing and safeguarding their capital through alternative investments. Historical data indicates that private market investments—when carefully selected—can lead to optimal portfolio diversification for clients with the appropriate risk tolerance. Furthermore, as more companies choose to remain private for extended periods, investors with portfolios solely composed of public equities risk missing out on potential market opportunities.
The number of U.S. public companies has diminished by approximately 43% since 1996, while the presence of private equity-backed firms has surged five-fold since the year 2000. Particularly striking is the fact that less than 15% of companies with revenues exceeding $100 million are publicly traded. Such statistics underline the shifting landscape and highlight the importance of incorporating private investments for broader economic exposure.
One of the critical differences between public and private markets lies in the longer-term capital commitments required for private investments. This necessitates meticulous selection of investment vehicles and precise management of allocation sizes. Additionally, private markets inherently present lower efficiency levels compared to public ones, underscoring the importance of partnering with seasoned managers who exhibit refined strategies and a proven track record of delivering superior long-term results.
In advising clients, it has been our steadfast belief to recommend diverse investments across various asset classes and fund managers. For ultra-high-net-worth individuals, allocating around 20-30% of their total investment towards alternatives can be appropriate, while high-net-worth individuals might target 10-15%. We advocate a disciplined approach to investment, encouraging consistent allocations across multiple strategies to maximize diversification and mitigate market risk.
Innovative Investment Vehicles
The advent of innovative open-end investment vehicles has greatly simplified access to alternative investments for individuals across wealth brackets. Unlike traditional closed-end funds characterized by periodic capital calls and drawn-out commitments, these new vehicles necessitate full upfront capital contributions. Open-end funds also allow for significantly lower investment minimums, broadening opportunities for high-net-worth investors to diversify their holdings over various fund categories and strategies as they increase their engagement with alternative assets.
However, while these funds offer a degree of liquidity—typically on a quarterly basis during robust market conditions—it’s vital for individual investors to approach them with caution. Understanding that these investment vehicles are not entirely liquid allows investors to prepare for scenarios where simultaneous withdrawal requests may hinder their ability to liquidate. Individuals should only invest amounts they can afford to have committed long-term, treating open-end funds similarly to conventional alternatives characterized by illiquidity.
Though many of these new funds lack established performance histories due to their nascent stages, their managers often possess extensive experience in other investment structures. Investors ought to evaluate the breadth of resources, team capabilities, and competitive strengths associated with these managers to inform their decisions effectively.
As wealth managers increasingly recognize the value of alternative investments, we anticipate that a widening array of opportunities will become available for individuals across different financial strata. With companies remaining private for longer spans, the quest for alpha generation, and an overarching trend toward enhanced portfolio diversification, the access to and availability of alternative investments will undoubtedly expand. Individuals ready to engage seriously with these investment types, armed with informed strategies and the guidance of financial professionals, are well-positioned to thrive in this evolving financial landscape.