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Private markets investments can be a powerful tool in helping investors create diversified portfolios and enhancing the traditional 60:40 stocks and bonds portfolio. They can improve outcomes and slightly reduce the volatility of a portfolio.

Private markets, which include unlisted investments in real estate, infrastructure, private credit and private equity can be accessed through a wide range of strategies, solutions and assets. These investments can enhance income streams and provide good inflation protection. Private markets also allow investors to have a direct sustainability impact in decarbonizing the economy, along with opportunities to make positive social impact too. As the European Long-Term Investment Fund (ELTIF), ELTIF 2.0 regulation update for alternative investment funds comes into force this January, the opportunities for investing in private markets may be opening to a wider audience.

Private markets investments can be a powerful tool in helping investors create diversified portfolios with higher return expectations and better risk-adjusted performance. Traditional portfolios have tended to be split 60:40 between stocks and bonds. As interest rates rose sharply in the wake of the pandemic, stocks and bonds showed increased volatility and higher correlations. Adding private markets investments can lead to improved outcomes and portfolios which are more resilient over the long term.

Historically, private markets investments have exhibited both higher returns and lower volatility than traditional public markets investments. This makes them attractive to investors who want to diversify their portfolios and use private markets to help reduce overall portfolio volatility. This is because private markets investments are not as strongly correlated with traditional asset classes as traditional assets classes are amongst themselves.

Global total returns and standard deviation

(13 years 2010 to 2022, local currency, % p.a.)

Source: MSCI; Global Listed Infrastructure Organisation; PitchBook; Refinitiv Datastream; ÃÛ¶¹ÊÓƵ Asset Management, Real Estate & Private Markets (REPM), December 2023. Note: Private markets data is de-smoothed; private markets real estate refers to direct asset ownership; private markets real estate funds refers to real estate ownership via unlisted funds; standard deviation measures volatility in returns. Past performance is not a guarantee for future results.

Total returns for portfolios which include private markets investments have historically been slightly higher than those which do not, which sometimes creates the perception of risk among investors. However, volatility as measured by standard deviation in returns has been slightly lower for portfolios which include private markets due to their lower correlations with the 60:40 portfolio