Explore how private markets can help investors meet their long-term financial goals, the benefits of private markets in the context of financial planning and how to incorporate private markets in the ۶Ƶ Wealth Way framework.
How can private markets help investors meet their long-term financial goals?
Private markets have grown in popularity among institutional investors: Average allocations for US public pension plans rose from 17% in 2012 to 21% in 2019, according to Preqin data. A key reason for this increase is the view that the asset class can improve both absolute and risk-adjusted returns for investors, relative to traditional liquid portfolios.
Historically, private markets have outperformed public markets by a significant margin. This additional return premium can enable greater wealth accumulation and wealth transfer opportunities, or support ongoing expenses. Illiquidity, complexity, and leverage are some of the contributors to this outperformance which we expect to persist in the coming years.
Private markets can also help investors focus on the long term. Private market funds are generally buy-and-hold investments with 10-year commitments (with two-year extensions possible). Typically, investors fulfill capital calls or investments occurring in years 1 to 5, and can start receiving back distributions in years 6 to 10. While investor capital is locked up during this time frame, the illiquid characteristics of private market investing is conducive to implementing strategic operational value creation, which illustrates a differentiated, active ownership approach to driving returns versus public investing.
Additionally, the illiquid nature of private markets prevents investors from selling out during market dislocations, while allowing managers to take advantage of attractive valuations in times of these dislocations. As such, private markets are particularly attractive for investors looking to participate in long-term secular trends in the economy, or match long-term liabilities.
Incorporating private markets in the ۶Ƶ Wealth Way framework
The ۶Ƶ Wealth Way* framework is designed to help investors achieve their lifetime goals as well as preserve and grow their wealth over generations. It is therefore the individual investor’s objectives and circumstances that primarily dictate the appropriate asset allocation choices. This also applies when thinking about how much to allocate to private markets.
The Liquidity strategy is designed to meet short term needs, while insulating the investor from selling out assets during periods of market volatility, locking in otherwise-temporary losses.
The Longevity strategy is designed to meet lifetime goals.
The Legacy strategy represents an investor’s excess resources—wealth that goes beyond what is needed to meet one generation’s lifetime objectives. This strategy focuses on wealth maximization, and on effectively passing this wealth across generations and to charity.
Investors are often averse to private markets given their preference for having liquid assets on hand, even though they typically may not have a purpose or timeline for using that liquidity. However, investors also forget that they “pay” for high liquidity, given the opportunity cost of investing in public markets. When we look at how much to allocate to private markets through the lens of the ۶Ƶ Wealth Way framework, investors may discover that they can tolerate higher proportions of private market assets as a percentage of their overall wealth, than if they took an approach of choosing an asset allocation that is agnostic of their goals, time horizon and liquidity needs.
Illiquid assets such as private markets can be incorporated in both the Longevity and Legacy strategies depending on investor circumstances, while the Liquidity strategy can help manage any risks associated with illiquidity.
What next?
In a changing investment landscape, the need to plan, and plan effectively, is as important as ever. Taking action now and aligning portfolios with personal and family objectives is critical. Creating plans that clearly outline short-, medium-, and long-term objectives can help investors create portfolios that improve their chances of achieving their goals.
The ۶Ƶ Wealth Way segments portfolios into distinct time horizons, enabling investors to incorporate potentially higher returning illiquid assets, such as private markets, that can help achieve higher growth or income levels. As exemplified by institutional and family office investors, we believe that incorporating private markets into a robust long-term plan can better position investors for ongoing success.
