Intrigued by Private Markets? Here's Everything to Know to Get in the Game

My last article “Why You Should Add Private Market Alternative Investments Now” received quite a few comments, emails and questions from readers eager to learn more about how to get informed and, ultimately, how to invest in this dynamic space. That’s understandable because private markets offer a compelling way to broaden your investment horizons, diversify your portfolio away from public stock and bonds. Over time, investors can potentially enhance returns and lower risk in the process.

For those unfamiliar with private market investments, such as private equity, private credit, private real estate, infrastructure, and hedge funds, this article serves as an accessible starting point.

Enter a Vast Terrain Filled With Opportunity

Private market investments differ significantly from traditional stocks and bonds, offering access to asset classes and strategies that aren’t available on public exchanges. Historically, alternative investments offer higher returns and lower volatility versus traditional stock and bond portfolios. The traditional 60% stock and 40% bonds portfolio can benefit from diversification into this area. 

See the chart below produced by iCapital showing the annualized returns and volatility of various private markets and other alternative strategies.

These include private equity (buyouts, venture capital, growth), private credit (direct lending, distressed debt), private real estate (core properties, opportunistic plays), infrastructure (roads, utilities, digital networks), and hedge funds (macro, event-driven, equity hedge). Each comes with unique risk-return profiles, liquidity constraints, and investment horizons. This world of investing is for long-term investors who want to compound their money over a longer period of time.

Your Starting Point? Understand Your Investor Classification – It Determines the Opportunities Available to You

But before diving in, there’s a critical first step: understanding your investor classification. Private markets are heavily regulated, and your eligibility depends on your financial status. Here’s a quick breakdown:

• Non-Accredited Investors: Individuals with limited net worth or income, often restricted from most private offerings.

• Accredited Investors: Those with a net worth over $1 million (excluding primary residence) or annual income exceeding $200,000 ($300,000 joint), unlocking access to many private funds.

• Qualified Clients: Investors with at least $2.2 million in assets under management, eligible for certain fee structures.

• Qualified Purchasers: High-net-worth individuals or entities with $5 million or more in investments, gaining access to the broadest range of opportunities.

Your citizenship (U.S. or non-U.S.) and tax status (taxable or tax-exempt) further shape your options, as do the tax documents you’ll receive — typically a 1099, K-1, K-3, or PFIC. These factors influence the fund structures available to you, such as interval funds (offering periodic liquidity), drawdown funds (capital called over time), or fully funded vehicles.

Consider the Big Picture for This Slice of Your Portfolio. The 4 Most Common Primary Goals

Private market investments can serve multiple portfolio objectives, making them particularly attractive and flexible. Think about what your overall goal is with this portion of your investments. Here are the four most common primary goals:

• Enhancing Returns: Strategies like private equity buyouts or venture capital tap into differentiated growth sources, aiming to outperform public markets over time.

• Supplementing Income: Private credit, such as direct lending, or core real estate offers alternative yield streams to bolster cash flow.

• Diversifying Risk: Hedge funds (e.g., market-neutral or macro strategies) and infrastructure investments often exhibit lower correlation to stocks and bonds, reducing overall portfolio volatility.

• Preserving Capital: Core real estate or infrastructure debt can provide stability and principal protection during market downturns.

Each investment usually is designed to have a primary and secondary objective, helping you slot it into your broader strategy. For example, a growth private equity fund might prioritize returns while offering some diversification, whereas a direct lending high-quality private debt investment could focus on capital preservation with income as a secondary benefit.

Familiarize Yourself With the Key Strategies to Zero in on the Best Investment Fit for You

Once you get started in private markets, you will quickly find out that there are many intricacies and nuances that are meaningful, so let’s start with the things you need to know that are most important. Here’s a snapshot of the major private market categories and their key strategies:

Private Equity:  

• Buyouts: Acquiring controlling stakes in mature firms, often with leverage, to boost value and exit profitably.
• Growth: Funding expansion in established companies typically without taking control.
• Venture: Investments in high-potential startups.
• Secondaries: Buying existing stakes in private equity from partners or funds.

Private Credit:

• Direct Lending: Loans to middle-market firms, often senior secured.
• Distressed Debt: Investing in troubled companies’ debt for potential recovery.

• Special Situations: Niche credit opportunities tied to unique events.

Private Real Estate:  

• Core: Stable, income-generating properties in prime locations.
• Opportunistic: Higher-risk, higher-return plays on undervalued assets.
• Debt: Securities loans backed by real estate assets and/or cash flows.

Infrastructure:

• Equity: Ownership in assets like toll roads or renewable energy projects.
• Debt: Financing infrastructure with relatively predictable cash flows.

Hedge Funds:

• Macro: Bets on global economic trends across asset classes.
• Event-Driven: Profiting from corporate events like mergers or restructurings.
• Equity Hedge: Long/Short equity positions to exploit mispricing.

Beyond these, niche options like farmland, timberland, and digital assets offer speculative exposure for adventurous investors.

There’s a Range of Ways to Invest, but Here’s a Rundown of the Major Points to Understand…

Private market funds vary widely in structure, liquidity, and access. Some are perpetual, while others have finite lives. Liquidity ranges from quarterly redemptions (often capped at 5% of fund value) to lockup periods (e.g., a one-year soft lock with a 2% early redemption fee). 

Funding can be fully committed upfront or drawn down over time as opportunities arise. Minimum investments, management fees (typically 1-2%), incentive fees (often 20% of profits), and operational expenses also differ, so scrutinize the terms.

Team up With Experts Who Understand the Space and Prioritize Your Interests—Don’t Get Sucked Into Shady Deals Lacking Credibility

There are plenty of private investments out there that individual investors might stumble into — many of which are likely to lose money. A lot of these deals are smaller, run by less-talented management teams or smaller investment firms, or tied to companies with ideas that don’t have much promise. Of course there is risk in this area of investment.

Stick with more well-vetted and established players in the private markets and be smart about avoiding overcrowded deals hyped up with no substance. Focus on opportunities with a higher shot at success, backed by management teams or independent advisors who work for your interests, not just pushing products for a commission. That’s how you’ll get better access to solid investments.

Make Your Life Easier by Having Private Investments Tracked in Your Brokerage Account

Accessing and staying on top of these funds really depends on who you’re working with. I’d go with a fiduciary registered investment advisor (RIA). These independent, unbiased RIAs bring sophistication, a wide range of product access, and a focus on lining up investments with your goals — key for tackling this tricky space. Plus, they’ve got institutional ties to big brokerage firms like Charles Schwab, Fidelity, Goldman Sachs, or JP Morgan, so you can track your private investments right in your brokerage account. That saves you a ton of time since they handle the updates for you. A sharp RIA with deep private market know-how will also keep you in the loop with detailed updates, layering on top of your own research depending on how much time and interest you’ve got to dig in.

Your Initial Checklist to Get Started

To begin your private market journey:

1. Assess Your Investor Status: Confirm your investor classification.

2. Define Your Goals: Are you looking to boost returns, income, or stability?

3. Research and Select Asset Classes: Match strategies to your risk tolerance and timeline.

4. Partner Wisely: Engage an RIA or leverage a key trusted partner.

5. Understand the Terms: Dig into liquidity, fees, tax reporting, and redemption policies.

Private markets aren’t a quick fix — they’re long-term commitments with limited liquidity. But for investors who embrace their nuances, they offer a powerful way to potentially improve portfolio performance and resilience. Don’t follow the masses, invest in areas that make economic sense and that aren’t rooted in hype. Avoid overcrowded areas where the herd instinct has left little on the table for you.

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