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Public/Private Convergence: One Crowded Trade After Another?
Institutional investors are seeking superior returns in private markets, but true portfolio diversification is proving difficult to find.
The Shift Away From Public Markets
Diversification has been the watchword of 2026 so far, particularly among European investors.
Morningstar research shows institutional investors have been keen to mitigate concentration in US equities in general, and Big Tech in particular.
The latest Morningstar report on European fund flows shows an accelerating rotation out of public growth-oriented equity and the tech sector over the last 18 months.
Growth-Oriented Equity and Tech Flows Over Three Years (EUR Billion)
Source: Morningstar Direct. Data as of March 31, 2026.
Private Markets: A New Source of Diversification?
At the same time, European institutional investors are increasingly looking to private markets to seek diversification and performance, as drivers of public market growth look more and more narrow.
However, the diversification benefit is not always so straightforward. In Europe over the last two years, private market total returns in equities have largely matched their public market counterparts (and slightly underperformed in 2026 year-to-date), as shown on the chart below.
European Equity Market Total Returns: Public and Private Market Indexes
Source: Morningstar Direct, Morningstar Indexes. Data as of April 28, 2026. Note: Chart shows absolute gross total returns in USD.
A Different Story in the US
The US tells a very different story.
Over the same time periods shown above, the largest US private market equities have hugely outperformed their public counterparts, such that a blend of public and private investments (illustrated by the Morningstar PitchBook Modern Market indexes) delivers a meaningful add to returns.
US Equity Market Total Returns, Public and Private Market Indexes
Source: Morningstar Direct, Morningstar Indexes. Data as of April 28, 2026. Note: Chart shows absolute gross total returns in USD.
The issue here is that those outsized US private market returns have largely been delivered by businesses with very large exposures to tech, AI, and adjacent growth themes.
Companies such as Anthropic, OpenAI, and SpaceX (which xAI has been merged into) have attracted substantial capital and reached exceptionally large valuations prior to any of their planned IPOs.
So, Are Investors Really Diversifying?
While it’s true that private markets can offer valuable access to innovation and long-term growth, there’s a real danger that investors seeking diversification and superior returns in private markets could just end up exchanging one crowded trade for another.
Investors should look beyond the public-versus-private label and examine the underlying exposures driving performance.
In short, true diversification is not simply about where an asset is traded but rather the risks that fuel its returns.
