How “Private” Are Private Market Funds?

Private market funds are often positioned as differentiated, exclusive, and diversifying additions to a portfolio. But new Morningstar research on semiliquid private equity and private credit funds suggests the reality may be more nuanced. 

While these strategies can offer structural differences–such as limited liquidity and access to private deal flow–there is frequent portfolio overlap in private equity and private credit funds. In some cases, the underlying economic exposures even resemble comparable public markets more than investors might expect. 

 Morningstar’s report, “Understanding Semiliquid Private Portfolios,” highlights the most important findings investors and advisors should understand, from portfolio overlap and concentration risk in private markets to the ongoing challenges of liquidity management. Read on for an overview and download the full report here. 

Private asset managers often emphasize proprietary sourcing and unique deal pipelines. However, Morningstar’s analysis suggests that semiliquid private funds invest in the many of same underlying companies. 

More than one third of direct lending assets are invested in companies held by five or more funds, pointing to a high degree of overlap across portfolios. At the fund level, the typical private credit fund shares about 20% of its borrowers with its average peers. 

This convergence challenges the idea that private portfolios are inherently exclusive. In fact, portfolio differentiation across private funds often resembles what investors see in less-liquid public markets. Average overlap levels are similar to those observed among small-cap equity and bank-loan funds. 

It’s also worth noting that these overlap estimates likely understate reality. Many private investments are held through co-investment vehicles or pooled structures, limiting transparency into underlying exposures. 

What this means:
Private portfolios may not be as distinct as advertised–making manager execution and fee structures increasingly important differentiators.

The similarities between private and public markets become even clearer in credit strategies. 

Morningstar found that at least 15% of direct lending assets are invested in companies that also appear in bank-loan funds. On a dollar-weighted basis, those shared issuers account for roughly 80% of bank-loan fund holdings. 

In practice, many companies borrow across both markets, using a mix of private credit and syndicated loans. While this doesn’t mean private credit portfolios are simply holding public loans, it does blur the distinction between the two. 

What this means:

Investors may be able to access similar underlying credit exposure through more liquid–and often lower-cost–public market vehicles such as mutual funds or ETFs, though often without leverage, a key differentiator for the semiliquid funds. 

Despite their positioning as diversifiers, semiliquid private funds can introduce meaningful concentration risk–particularly in the technology sector. 

Morningstar estimates that about 27% of assets in the largest holdings across these funds are allocated to software companies. When broader definitions are applied, software exposure rises closer to one third of assets. By comparison, software accounts for roughly 6% of the S&P 500.

This concentration isn’t limited to software. At the industry level, the top five sectors account for about 55% of semiliquid fund assets—significantly higher than the just over 40% seen in the S&P 500. 

What this means:
Allocating to private markets may increase–not reduce–portfolio concentration, particularly in technology-driven sectors. For investors concerned about exposure to trends like artificial intelligence and software disruption, this concentration is especially important to understand. 

Liquidity is one of the defining features of semiliquid funds–and one of their most important risks. 

Managers must carefully balance holding enough liquid assets to meet investor redemptions without letting excess cash drag on returns. Morningstar found that private equity semiliquid funds hold nearly 15% of assets in cash on average, while direct lending funds hold roughly half that amount.

At the same time, private credit portfolios generate natural liquidity over time as loans mature or are repaid. These portfolios typically have weighted average maturities of four to five years, implying a steady–but not immediate–source of cash flows. 

What this means:
Liquidity in private funds depends on a delicate balance between cash reserves, repayment timing, and investor flows. In periods of stress or elevated redemptions, that balance can become more difficult to manage. 

One of the most compelling selling points of private markets is access to high-profile, privately held companies. But even here, exclusivity may be overstated.

Semiliquid funds do offer exposure to companies like SpaceX, OpenAI, and Anthropic. However, Morningstar notes that some mutual funds and ETFs also provide access to these names. In addition, most private equity semiliquid funds focus primarily on buyout strategies rather than venture capital, limiting their exposure to early-stage, high-growth companies.

What this means:
Access to “unicorn” investments alone may not justify higher fees or reduced liquidity–especially if similar exposure is available elsewhere.

Taken together, Morningstar’s findings challenge several common assumptions about private markets. 

These funds may be: 

• Less differentiated than expected 
• More concentrated in specific industries 
• More similar to public markets than commonly believed
• Structurally constrained by liquidity considerations 

• Evaluate underlying exposures–not just strategy labels 

• Compare fees relative to portfolio uniqueness  
• Consider whether similar exposure exists in public markets 
• Understand how liquidity constraints may affect outcomes 

Are private markets really diversified? Private market investments are often framed as a distinct and diversifying asset class. However, Morningstar’s research suggests these portfolios frequently overlap, concentrate risk in private markets, and share characteristics with public markets. 

In many cases, “private” does not necessarily mean “unique.” 

For investors and advisors alike, the takeaway is clear: evaluating private market strategies requires the same level of rigor–and skepticism–as any other allocation decision.