How Private Equity in Your Portfolio Could Boost Returns

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When it comes to investing, there is a stark contrast between ordinary investors and those with the deepest pockets (ultra-high-net-worth individuals, institutions, sovereign wealth funds, etc.).

According to a survey by KKR, ultra-high-net-worth families — those with over $30 million — allocate nearly 46% of their assets in alternative investments such as private equity, private credit and private real estate, with only 29% in publicly traded stocks.

By contrast, more traditional investors allocate just 3% to 5% of their portfolio in private assets. For decades, the biggest check writers have flocked to private markets for one reason: performance.

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For the last 35 years, global private equity has outperformed global equities — just as U.S. private equity has outpaced the S&P 500. Between 1986 and September of 2024, global private equity as an asset class produced average annual returns of 15.8%, while global equities produced 8.5% over that period.

Even within private markets, performance matters. Many top-quartile firms have done substantially better than the average, putting them in high demand by the most sophisticated investors and making them extremely difficult to access for anyone else.

Additionally, when it comes to bear markets, private equity has historically experienced a less significant drawdown and quicker recovery than public markets.

In the 1990s, private equity was considered a “cottage industry,” but it has since exploded into a multitrillion-dollar asset class that focuses on the vast universe of private companies. In the U.S. alone, 87% of all companies with over $100 million in annual revenue are privately held.

This creates a significantly large subset of opportunity in which to find and create value. This is in stark contrast to shrinking public markets, which have fallen from over 8,000 public companies in 1996 to just under 4,000 today.

Now, this is not to say that public stocks do not have a role in our portfolios. They absolutely do. They are an important ingredient in many well-diversified portfolios —including my own.

My point is that they are complementary, and adding private equity to a typical stock-and-bond portfolio has the tendency to not only reduce volatility but also increase returns.

The race for the front of the line

By design, private equity funds are limited in their size. They are not infinitely scalable, so getting access to the best managers becomes highly dependent upon relationships and purchasing power.

Your ability to access private vehicles can also depend on your qualification status, which is applied by the SEC:

Qualified purchasers. Those with $5 million or more investable assets can access nearly all private funds, giving them much more flexibility to select the managers they desire, if they can gain access, which is another challenge altogether.

Individuals can rarely go directly to a private equity sponsor without a nine- or 10-figure check, meaning it is key for them to work with allocators who can pool their purchasing power and gain purchasing power at a much larger scale.

Accredited investors. Defined as those with at least $200,000 in income ($300,000 if filing jointly) or a $1 million net worth (excluding the value of an investor’s residence), these investors are allowed to invest in some vehicles that invest in private markets.

One such vehicle gaining popularity among accredited investors is called an interval fund. These typically give investors the ability to invest all their capital up front (no ongoing capital calls), add new money as they go and have periodic liquidity (usually quarterly or semiannual).

As the world of private markets seeks to court the trillions of investable dollars from individuals, these funds are becoming increasingly popular.

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For those looking for private equity or private credit exposure via the public markets, there are a few options. With business development corporations (BDCs), income typically comes from debt and equity investments in private companies, and they must distribute at least 90% of taxable income to shareholders. They trade somewhat like a stock and thus have increased volatility.

Closed-end funds are another option as certain types may invest in private companies, but they can often trade at a substantial discount to their true net asset value.

Both have pros and cons that should be discussed with an adviser.

Find a guide

As we look to the future, it is important to remember that not all private equity is created equal. If you are going to agree to less liquidity than traditional stocks, you should be rewarded.

Therefore, you must be selective in finding managers who have consistently outperformed their peers over long periods of time. Investors should find a trusted source for accessing high-quality opportunities. Deep relationships and proven track records should be the top priority for you and your adviser.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Christopher Zook is the Founder, Chairman and Chief Investment Officer of CAZ Investments. With over 30 years of experience in traditional and alternative asset investing, he was honored with the Texas Alternative Investments Association’s Lifetime Achievement Award. He is a regular contributor to major media outlets and is actively involved in public policy. In 2019, Christopher was appointed by the governor to serve on the State of Texas Pension Review Board, where he chairs the Investment Committee. Christopher recently co-authored The Holy Grail of Investing with Tony Robbins, which became a No. 1 New York Times bestseller.