Private Investments: Benefits, Risks, and Trade-Offs

Do private investments improve portfolio outcomes, or do they introduce risks that advisors need to understand more carefully?

Morningstar’s Christine Benz and David Reyna examine the most common private market categories, including private equity, private credit, real estate, and infrastructure, and explore how these investments have behaved during periods of market stress.

They also discuss liquidity constraints, valuation challenges, fee considerations, and why the smoother returns often associated with private assets may not always reflect lower risk. From the COVID-era selloff to broader portfolio construction questions, David takes a closer look at the tradeoffs behind growing allocations to private markets.

Our latest research on building a diversified portfolio includes:

• A comparison between the performance of diversified portfolios vs. 60/40 portfolios in the 2025 market 
• Analysis between asset-class correlations during higher interest rates, inflation, and economic slowdowns 
• Deep dives into 12 major asset classes and their role in a portfolio

Christine Benz: Can you talk about first, before we get into the findings: What are the most common types of private investments that people might be looking at? 

David Reyna: Sure. So, when we're talking private investments, we're talking private equity, private credit. And so, basically, private equity being that you're investing in private companies. You're not picking a publicly traded company—you're investing in private credit. 

That's where small and mid midsize companies are taking loans on the private market, real estate—you know, so the unlisted REITs, publicly listed REITs that people trade—those, and then infrastructure as well. You know, trading things outside of the public space.

Benz: So when you look at the data, what do they say about the value or the merits of adding investments like these? And maybe you can take them category by category. If I have this plain-vanilla portfolio of public equities, public bonds, are there merits to adding the privates?

Reyna: It's a complicated story, I think, is the real gist. So they look very attractive in a lot of ways, mainly due to the smoother performance. 

So you're seeing a lower volatility in the performance. And that really can be misleading because it really doesn't mean lower risk. It just means that the valuations and the way these things are valued and the timeframe upon which these are valued is very different than what we're used to in public markets. 

So you can have, you know, these private equity products for example. They kind of behave like small-cap leveraged stocks with a lockup, that's kind of how Jack [Shannon] in the paper put it. So you're seeing, you know, retail investors kind of come into these spaces and they're going to see very smooth returns. But that really can kind of mask the risk that's underneath. And institutions, you know, historically who have been in these products for a long time, can kind of handle that illiquidity better.

Reyna: The problem with privates potentially is that the timing of these liquidity issues can correspond to kind of crisis times or things where public markets aren't doing well. Therefore, you know, being the worst-case scenario. 

So, I think you have to understand the liquidity concerns. You have to understand the higher fees which a lot of these products have. And so the access to the the assets matter, and the timing of that too.

Benz: Can you talk about private equity in an equity market shock? If we look back on periods--whether 2022 or further back to the great financial crisis. How do private investments, private equity in particular, look in periods like that?

Reyna: So let's talk about 2020 first. So during covid you had a situation where the private markets looked a lot smoother. You know, the US market index that we referenced earlier was down about 20% in 2020 at a certain point and the privates had just a moderate loss reporting at the same time. 

Now, what happens is that basically they're under the same pressure. It's just that the way they display that pressure is different. And so you eventually saw that a lot of these people weren't able to get their money out of these portfolios. They were having liquidity issues, and the valuations eventually got there after a bit of a lag period. And some of these 2020 vintages are still underwater today. So this is really the risk that you run when getting into these kind of illiquid products. 

Benz: Okay, good overview. Thank you for that.