With public markets offering fewer listed companies and private strategies often delivering stronger net returns than their public counterparts, many advisors are adopting a 50/30/20 model in clients’ portfolios, with 20 percent allocated to alternatives. ¹² As this category becomes a core building block, it is important to understand how private equity, private credit, and real assets each contribute to positive portfolio outcomes.
What the Data Show
Private assets can deliver a return premium while maintaining a risk profile that aligns with sophisticated investors’ expectations. Recent research highlights the distinct performance profiles of private asset classes.
For example, private debt has delivered strong results: McKinsey reports it “posted the highest investment returns of any private asset class through the first three quarters of 2023.” ³
By contrast, as of September 2023, private equity produced only modest net IRR, and real assets, including infrastructure and natural resources, fell below long-term averages due to rising interest rates and macroeconomic pressures. ³
Performance alone does not capture the full value of private assets. When combined with public equities and bonds, private assets can improve the health of the portfolio. T. Rowe Price analyzed data from 2005 through 2023 and found that adding 20 percent in private assets to a traditional 60/40 portfolio increased expected returns between 20 and 40 basis points, depending on the asset mix, without materially raising volatility. ⁴
Taken together, these results underscore why investors may benefit from understanding the distinct roles each private asset class can play within a diversified portfolio and should consider incorporating them into their portfolios.
Comparing the Choices
Each asset class provides its own potential advantage in a diversified portfolio.
Private Equity
Private equity aims to generate long-term growth. Investors accept illiquidity and longer payout horizons, understanding that sponsors are focused on building enterprise value over multiple years. However, private equity valuations fluctuate. T. Rowe Price notes that the true or “unsmoothed” volatility of private equity often is higher than many investors anticipate, largely because valuations are determined over time, rather than daily in the public markets. ⁴
Private Debt
Private debt, including fixed or floating-rate loans, direct corporate lending, asset-backed lending, specialty finance, consumer lending, and residential mortgage lending, plays a more defensive role. It sits higher in the capital stack than equity, which seeks to reduce default risk and makes it less sensitive to market volatility, particularly when loans are secured or senior. Private debt generally provides higher yields than most public bonds. ⁵ In today’s inflation-driven, elevated-rate environment, interest income from private debt has become increasingly attractive. ³
Real Assets
Real assets encompass a broad set of exposures that is designed to enhance portfolio diversification. Aside from commodities, they encompass real estate, infrastructure, and natural resources. Historically, these assets have delivered competitive returns with lower volatility than global equities when diversified by type or geography. They can provide steady income, function as inflation hedges, and exhibit low correlation with equities and bonds, reinforcing long-term portfolio resilience.
Commodities offer classic inflation protection because their value is set in the physical market rather than by central bank policy or corporate earnings. They span energy, metals, grains, softs (such as coffee and cocoa), and agricultural or livestock products. Like other real assets, commodities typically show low correlation with public assets, but their higher volatility requires careful implementation and ongoing monitoring in a direct investment strategy. 6
The Private Securities Mandate in Managed Portfolios
Over the last decade, RIAs and professional managers increasingly have included private securities in client portfolios. Research by Morgan Stanley Capital International (MSCI) confirms the validity of this approach. Their analysis shows that a 15% allocation to private assets may increase expected returns by forty basis points annually while maintaining similar levels of market risk. 7
For portfolios focused on direct private investments, these distinctions are critical. A balanced mix of equity, debt, and real assets can produce a smoother, more durable return stream.
Potential benefits include:
- Generating regular cash flow from debt and real assets
- Reducing drawdowns compared with an equity-only portfolio
- Adding uncorrelated return drivers
- Improving long-term risk-adjusted returns
As these investments can enhance risk-adjusted returns and deliver long-term, more stable outcomes, advisors have begun differentiating themselves by leveraging the larger world of alternative investments, adding tangible value to clients.
The Challenges of Private Securities
Private securities also carry inherent limitations and risks. Unlike public equities or ETFs, which trade continuously and mark-to-market in real time, private assets are valued less frequently against comparable assets, without a liquid secondary market. This infrequent valuation can make reported returns appear smoother than the actual economic experience, meaning true volatility may be higher than reported “smoothed” values. ⁴
Investors typically commit capital in the form of equity for five to ten years or longer before an exit event occurs, such as an IPO, acquisition, or secondary sale. Equity holders may face total losses if the underlying company fails, with no public market to sell into.
Reporting requirements are less stringent in private markets, creating lower transparency and the potential for both outsized gains and significant losses. Outcomes can vary significantly by sponsor, vintage year, and asset selection. While diversification helps manage risk, it cannot eliminate it entirely.
Successfully including private assets in high-net-worth individuals’ portfolios requires careful monitoring and disciplined allocation decisions, but it can be an effective way for advisors to differentiate themselves.
Implications for Direct Investment Portfolios
Investors increasingly incorporate private securities to capture their distinctive benefits and the wide range of available opportunities. As portfolios adopt direct investment protocols, no single private asset class can support an alternatives allocation on its own.
- Private equity drives growth
- Private debt delivers income and downside protection
- Real assets provide stability and inflation resilience
Together, these assets form a diversified core that strengthens the 50/30/20 portfolio model, improving resilience, long-term returns, and risk-adjusted performance.
For further insights on the evolving role of alternatives in high-net-worth portfolios, see Carofin’s article, RIAs and Private Placements: A Flourishing Investment Category.
1 Center for Research in Security Prices; According to the Bureau of Economic Analysis, the number of listed companies as of Q1 of 2023 was 4,572, a drop of 43% since 1996.
2 See Hamilton Lane Data via Cobalt, Bloomberg (January 2023).
3 McKinsey, Global Private Markets Report 2024: Private markets in a slower era
4 T Rowe Price, A Closer Look at the Diversification Benefits of Private Assets
5 Neuberger Berman, Public/Private Investing: Fixed Income at a Crossroads
6 Kotak Securities. Role of Commodities in Portfolio Diversification
7 MSCI Research: Private Assets Helped Wealth Managers Elevate Returns
