“Private markets” refers to investments in the equity and debt securities of companies or assets that are not listed on a stock exchange. These markets encompass a wide variety of assets, such as private equity, private debt and private real assets. Private markets’ investment universe is much broader and diversified than public markets’, and thus require a special net to capture these long-term opportunities. 

The odds for those investing in private markets directly and alone are not favourable. Even in leveraged buyouts (LBOs), 28% of investments underperform, while nearly 18% are a large success. These numbers reflect the fundamental nature of private markets: returns are not forming a symmetric bell curve (a ‘normal distribution’), and simply holding multiple investments does not mitigate risk. But with the right strategy through professional fund management, diversification, and disciplined capital deployment, private market investing can move toward a more structured approach.

Investing in private companies requires to be hands-on

Investing in private markets isn’t just about picking promising businesses, it’s about shaping outcomes. In venture capital (VC), investors focus on identifying promising innovations, guiding startups through growth, and managing high failure rates. The challenge isn’t just finding the right startup, it’s ensuring that it has the capital, talent, and strategy to succeed. In LBOs, investors take a different approach, often targeting established businesses that can be restructured, optimised, and repositioned for growth. The ability to reshape a company, improve efficiencies, and strengthen leadership teams is notably what separates a successful LBO from one that underperforms. Without these active management strategies, private investments are left to chance.

The cost of investing: Understand what are you paying for?

One of the most frequent concerns investors have about private markets is the cost. Private equity funds typically charge an annual management fee of 1.5% to 2%, which covers sourcing deals, selection, and ongoing oversight. On top of this, fund managers receive a 20% carried interest, meaning they take a share of the profits if the fund performs well. This structure aligns incentives between fund managers and investors, as managers earn substantial returns only if they generate value for the clients. This means that selecting top-performing funds is crucial. Funds of funds add an additional 0.5% to 1%, but in return, they provide exposure to 10 to 30 funds, each investing in multiple companies, further spreading risk. 

A single LBO fund carries a 10.5% chance of underperformance. But for investors who allocate across multiple funds, that risk drops to below 5% in a well-structured portfolio. A key reason for this is access. Many of the best-performing private equity funds are not available to individual investors, meaning that investing alone often results in exposure to lower-performing funds. Investors in funds of funds, however, gain access to managers with strong track records and more established networks, improving the probability of positive returns. Rather than being a cost, fees in private markets are an investment in risk-adjusted returns. Investors aren’t just paying for asset management; they’re paying to increase their odds of success.

Spread risk - the power of diversification

Private equity funds significantly reduce the risk of loss compared to direct investing, and funds of funds take this even further.  Funds of funds help smooth returns by providing exposure to multiple fund managers with different strategies. This reduces dependency on market cycles: A well-structured private market portfolio smooths out risks by spreading investments across different investment cycles, providing stability in otherwise unpredictable markets. The most successful private equity investors thus commit capital consistently over time rather than trying to predict short-term fluctuations.

Private markets offer the potential for strong returns, but they require a fundamentally different approach than public markets. Investing without professional guidance can lead to unpredictable outcomes. By leveraging fund managers, diversification, and disciplined capital deployment, private market investing moves toward a structured, strategic approach.