The Dutch East India Company dominated the trade between Europe and Asia of spices, silk, tea and coffee – as well as forced labor and slavery. Valued at some €7.5 trillion in today’s terms, or more than the current combined market capitalization of Apple and Nvidia, the Dutch East India Company was funded by the state and also private investors. Those wealthy merchant families had the exclusive opportunity to invest in commercial voyages – which were fraught with danger and could last up to two years – in return for a percentage of potential future profits.

Plus ça change

Fast forward to the present. Private-market investing has changed in some ways beyond recognition but in other ways has not changed at all. It is still characterized by elevated risk and long-term horizons, and still offers the potential of an outsized illiquidity premium to those with the appropriate profile, risk appetite and investment horizon.  

Here in Europe, the introduction of the European Long-Term Investment Fund (ELTIF) framework in 2015, followed by “ELTIF 2.0” in January of last year, expanded access to private-market opportunities previously limited to institutions and the ultra-wealthy. Today, that shift is often described as the “democratization of private markets” – but that is not quite right, or at least not necessarily an especially good idea.  

Historically, private markets have outperformed public markets over the long term and on a risk-adjusted basis. Private markets also represent a growing opportunity set – now valued at a total of over €15.5 trillion globally – covering a vast swathe of future-focused structural themes, including digitalization, decarbonization, demographics and deglobalization. Critically, as part of a balanced portfolio, private markets have the potential to enhance diversification and reduce long-term risk.

Historically, private markets have outperformed public markets over the long term and on a risk-adjusted basis.

Stéphane Pardini, Head of Wealth Management Luxembourg, Quintet Private Bank

Beyond 60:40

For all those reasons, including the regulatory changes that have broadened access, private markets have increasing appeal. Next-generation investors, in particular, are likely to see private markets as key to unlocking growth that may be limited by the typical 60:40 allocation of stocks and bonds.

At a time when equities and fixed income are often moving in lockstep – driven by factors such as inflation, interest rates and generalized macroeconomic uncertainty – it is important to keep in mind that not all private-market investments are created equal. Many are in fact highly correlated to equities and other risk assets. That is why diversification within private-market investments, based on a multi-alternative approach, is especially important when seeking to mitigate broader portfolio risk while still accessing key secular themes and capturing the all-important illiquidity premium.

The opportunity to construct a diversified portfolio that blends different types of liquid and illiquid assets – leveraging the ELTIF 2.0 framework for the latter – is supported by an expected increase in worldwide private-market opportunities. That is thanks to improved financing conditions, as lower interest rates make it easier for companies to secure funding, and the convergence of buyer and seller price expectations, which is helping to boost dealmaking and exits. Both factors enhance the appeal of private markets by indicating a robust, dynamic environment where investors can actively trade assets – supporting improved returns, increased liquidity and heightened investor confidence.

Thanks to ELTIF and ELTIF 2.0, individual barriers to entry have come down and lock-up periods frequently become shorter. In parallel, there are now greater opportunities to target private-market funds directly – rather than accessing them via feeder funds – increasing transparency and reducing costs to investors. Investing via digital private-market platforms can further reduce costs and help streamline what can be a time-consuming and complex process.

The perils of democracy

A final word about the so-called “democratization of private markets.”

The idea that anyone should be able to invest in any asset seems as fundamental as democracy itself. Four centuries after the Dutch East India Company first offered private-market access to select merchant families, millions now seize such opportunities.

The idea that anyone should be able to invest in any asset seems as fundamental as democracy itself.

lario Attasi, Head of ICS Luxembourg, Quintet Private Bank

However, private markets are not for everyone. Despite evolving regulations, they lack the oversight of public markets. Private-market investments take time to yield returns, and lock-up periods limit liquidity. Fully democratizing access could introduce systemic risks.

At Quintet Private Bank, we are convinced that introducing targeted private-market strategies to a balanced portfolio has the potential to enhance overall, long-term portfolio performance. We also believe that such opportunities are only right for investors with the appropriate profile, risk appetite and investment horizon.