Private equity has long sat on the periphery of traditional investment portfolios—often viewed as complex, illiquid, and reserved for institutional investors. However, that perception is beginning to shift. As access improves and investor demand grows, private equity is moving closer to the mainstream, prompting both advisors and clients to reconsider its role within a diversified portfolio.
In this discussion with Adam Myers of Pengana Capital, the conversation explores not only what private equity is, but why it is gaining traction, how it behaves across market cycles, and what investors need to understand before allocating capital.
At its core, private equity refers to ownership in businesses that are not listed on public exchanges. Unlike listed equities—where shares can be bought and sold easily—private equity investments are typically accessed through pooled structures, where fund managers acquire and actively manage stakes in private companies.
These managers do more than simply invest. They aim to improve operations, scale businesses, and ultimately exit at a higher valuation, returning capital and profits to investors over time.
This fundamental difference—active ownership rather than passive exposure—is what underpins much of private equity’s appeal.
One of the key drivers behind the growing interest in private equity is structural change within capital markets.
Companies are now staying private for longer. With abundant access to private capital, businesses no longer need to list early to raise funds. As a result, a significant portion of value creation is happening before companies ever reach public markets.
This has created a gap for investors.
Those relying solely on listed equities may be missing exposure to some of the most dynamic and high-growth businesses—many of which exist entirely within private markets. It is this shift that has fuelled demand for new structures that allow a broader range of investors to participate.
Despite its appeal, private equity is not without its challenges—and these are critical for both advisors and clients to understand.
Traditionally, private equity investing has required large capital commitments, often in the millions, with funds locking up capital for extended periods—typically 10 to 15 years. Investors commit a total amount upfront, but the capital is drawn down over time through capital calls, where the fund requests portions of the committed capital as opportunities arise.
This creates a unique cash flow dynamic. Investors must hold liquid capital to meet these calls, without knowing exactly when they will occur. At the same time, distributions—when investments are realised—are also unpredictable.
Liquidity, therefore, is one of the defining trade-offs of private equity.
While newer structures aim to improve access and flexibility, the underlying assets remain inherently illiquid. This mismatch between perceived and actual liquidity is one of the most important risks to manage.
Historically, private equity was dominated by institutional investors—sovereign wealth funds, endowments, and large family offices. Today, however, the landscape is evolving.
New structures, including listed investment vehicles and evergreen funds, are making private equity more accessible to high-net-worth and even retail investors. These structures aim to:
In the case of listed vehicles, investors can gain exposure via public markets while still accessing underlying private assets. This represents a significant step toward the democratisation of private markets, though it introduces its own trade-offs—particularly around pricing and market sentiment.
From a portfolio construction perspective, private equity offers several compelling characteristics.
Over the long term, the asset class has historically delivered higher returns than listed equities. More importantly, these returns are often accompanied by lower observed volatility and lower correlation with traditional asset classes.
Part of this is structural. Private assets are not priced daily, which reduces short-term volatility. But more significantly, private equity benefits from:
This combination allows private equity managers to create value beyond market movements, focusing instead on improving business performance over time.
While the asset class itself can be attractive, outcomes in private equity are highly dependent on manager quality.
Unlike listed markets—where performance differences between managers may be relatively narrow—the dispersion in private equity returns is significant. The gap between top-performing and underperforming managers can be substantial, making selection a critical factor in achieving desired outcomes.
This reinforces an important point:
private equity is not a passive asset class. Success relies heavily on expertise, access, and execution.
There is no universal “correct” allocation to private equity, but common themes emerge across different investor segments.
Institutional investors and large family offices often allocate meaningful portions of their portfolios—sometimes into the teens or higher—reflecting their longer investment horizons and reduced need for liquidity.
For most investors, however, the appropriate allocation depends on two key factors:
Private equity is best suited to capital that can be committed for the long term, without reliance on near-term access. As such, it is typically positioned as a satellite allocation, complementing more liquid core assets.
Like all investments, private equity is influenced by broader economic conditions. However, its structure provides certain advantages during different phases of the cycle.
In downturns, private equity funds are not forced sellers. With committed capital and long-term horizons, they can take advantage of distressed opportunities and acquire assets at more attractive valuations.
At the same time, active management allows funds to improve business performance even in challenging environments—mitigating some of the impact of macroeconomic pressures.
Perhaps most notably, performance variation across managers often outweighs the impact of the broader market. This highlights once again that execution matters more than timing in private equity investing.
Private equity is not suitable for every investor, but it can be highly effective for the right profile.
Typically, it appeals most to investors who:
In many cases, this includes high-net-worth individuals, family offices, and institutional investors. However, with improved access structures, the range of suitable investors is gradually expanding.
For advisors, one of the most important roles is ensuring clients fully understand what they are investing in.
Misalignment between expectations and reality—particularly around liquidity and timeframes—can lead to significant issues. Investors may underestimate how long capital will be tied up or misunderstand how capital calls operate.
Equally, insufficient diversification or overconcentration in a single strategy can increase risk unnecessarily.
Education, therefore, becomes critical. Clients need to understand not just the potential returns, but the structure, risks, and trade-offs involved.
Private equity is no longer a niche asset class reserved for institutions. As access improves and market dynamics evolve, it is becoming an increasingly important component of diversified portfolios.
Its appeal lies not just in the potential for higher returns, but in its fundamentally different structure—one that emphasises long-term value creation, active management, and strategic capital deployment.
However, these benefits come with complexity. Illiquidity, manager selection, and cash flow management all require careful consideration.
For those who understand and can accommodate these dynamics, private equity offers a compelling opportunity—not as a replacement for traditional assets, but as a powerful complement to them.