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The Allure and Risks of Investing in Private Markets
Private markets have gone mainstream, but there’s still much to consider for all players.
Key Takeaways
Private market assets have grown rapidly, now exceeding $15 trillion globally.
Semiliquid structures are expanding access to private equity, credit, and real assets for individual investors.
While private credit offers yield and diversification, transparency and cost remain key concerns.
The trendiest portfolio diversification and growth vehicles aren’t traded on public markets. They’re private funds, and they’re hard to own and even harder to value. Over the past 25 years, the number of listed US companies has roughly halved while global private market assets have surpassed $15 trillion. And given how few investors have exposure to private markets, that shift means many investors are missing a growing share of value creation.
US Public Market Size Compared With Global Private Fund AUM
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Private market assets have grown rapidly, now exceeding 15 trillion dollars globally.
Source: PitchBook. Data as of June 30, 2024.
Adding private assets to a client’s portfolio can help restore balance by introducing different sources of return and diversification. However, as is always the case, there’s no guarantee of future returns.
PitchBook’s 2025 study, “Are Private Markets Worth It?” found that adding private equity buyouts and private debt modestly improved portfolio returns, while private real estate slightly reduced returns but lowered volatility.
So, are private markets the right fit for your clients? It’s unclear. But given the rise of the space and the increased demand from clients, it's evident that they’re impossible to ignore. Here’s what to know about the emergence of private markets into the mainstream.
How Do Investors Access Private Markets?
Semiliquid funds are the main vehicle for investing in private markets.
- These funds are commonly used to provide access to alternative investments, like private equity, real estate, or credit strategies, where the underlying assets are not easily traded.
- They aim to balance the need for access to money with the long-term nature of the investments they hold.
- They’re mainly available through a financial advisor, as individuals have limited access to purchase them directly.
- Retirement plans are speculated to be the next frontier that will open to private markets.
In 2026, a flood of collective investment trusts is expected to capture rising demand for private assets, aided by a recent executive order promoting their inclusion.
Do Private Equity and Private Credit Outperform Public Markets?
It’s still difficult to proclaim private markets outperform public ones, or vice versa. That’s because private funds’ returns are traditionally measured on the timing of capital calls and distributions to shareholders. This money-weighted return calculation is called an internal rate of return (IRR), and it makes the present value of cash inflows and outflows equal to zero. It has its use cases but shouldn’t be compared with actual annualized returns. Mutual fund and ETF returns, on the other hand, are time weighted.
As of June 2025, there was approximately $64 billion in net assets in equity semiliquid funds. Outside of just a couple of funds, most semiliquid funds that focus on private equity or venture capital have failed to beat the S&P 500 since their respective inceptions, though many are still relatively new funds. More than 90% of equity semiliquid fund assets are in tender-offer funds. Since tender-offer funds aren’t required to have a fixed liquidity schedule like interval funds, there’s a better match between liquidity and the long-term nature of investing in private companies.
Private credit, on the other hand, has done well for itself so far. For example, the largest semiliquid private credit funds have provided investors with a return greater than could be had in leveraged loans. However, most private credit funds use leverage while indexes are generally unleveraged. Leverage magnifies both losses and gains, but in private credit, the upside is easily seen, while the downside risk can be masked until a credit cycle occurs.
What Are the Risks of Private Market Investing?
While the pros of private market investing may still be more theoretical and focused on long-term potential, the cons are more apparent and impactful in the short term. Fund transparency, limited liquidity, and the fees associated with private vehicles are major considerations. Semiliquid fund fees are often two to three times more than mutual funds, as illustrated in the chart below.
Private vehicles’ high fees can erode returns and may prompt litigation. Excessive fee lawsuits against fund companies have been more common in recent years, and any plan sponsor that increases fees would need to be wary. For funds with target-date strategies, the limited liquidity may make it harder for plan sponsors to switch strategies if they decide it’s in the best interest of participants. Larger plans may have to wait several quarters or more to fully transition out of the semiliquid fund.
Average Expense Ratio by Investment Type
Source: Morningstar Direct. Data as of Dec. 31, 2025.
Private Markets: From Theoretical to Practical
Preliminary simulations from Morningstar’s Wealth Forecasting Engine and private market modeling framework suggest that adding 5%–10% diversified private exposure to target-date glide paths can raise median lifetime returns by 20–40 basis points annually. These models incorporate PitchBook private market indexes to better reflect the yield, spread, and diversification characteristics of private credit and equity than legacy closed-end fund data.
The evidence supports what theory implies: Measured allocations to private assets can enhance long-term outcomes when embedded into diversified, perpetual vehicles with prudent liquidity management.
While private markets may be more mainstream in 2026, they still require significant thought and consideration from sponsors and participants alike. For additional commentary and analysis of the trend, and many other investing trends, download the free Morningstar 2026 Global Outlook.
