How Asset Owners are Thinking About Private Markets

The last few years have been a challenging time to be invested in private markets.

The sharp rise in interest rates, persistent inflation, continued uncertainty about tariffs, a lackluster initial public offering market and changes to federal funding for some institutions, have led to a liquidity crunch at a time when some asset owners had heavily allocated to private markets. Anemic returns have compounded the problem.

Yet, given asset owners’ long-term investment horizons, experts say private markets will still play an important part of asset allocation, as the strategic reasons for being in private markets have not changed.

What has changed is a revaluation of liquidity needs and diversification, especially as the entry of retail and defined contribution plan participants into private markets will give asset allocators more competition and likely result in lower future returns.

Revisiting Models

During the zero-interest-rate environment—that lasted from roughly 2008 to 2021—some investors entered private markets for yield and return, while others sought diversification and uncorrelated return, says Rowena Carreon, head of investment advisory solutions at Addepar.

The overall market had created a “passive effect” of over-allocation to strategic asset allocation targets, she says. Private markets still have their place, but the last few years have “prompted a reevaluation of both liquidity as well as the importance of dynamic portfolio management over time,” Carreon says.

Each asset owner will have to review its circumstances and make changes as necessary, she says. However, Carreon adds, given reduced federal funding, the prevailing endowment model likely has fundamentally changed.

“The idea of having 40% or more in private markets exposure, while having to draw down your endowment in ways that you hadn’t historically, I think is going to change the paradigm for their investment model,” she says.

Carreon says the key to investing in private markets is having a long-term view with a disciplined philosophy around making commitments, adjusting for market conditions and having a disciplined pacing program.

Andrew Junkin, CIO of the $123 billion Virginia Retirement System, says VRS sticks with a pacing schedule to stay at or near its target weights in private markets. “Those markets are super, super hard to try to time,” he says.

Virginia’s allocations are 16% each for private equity and private credit, and 14% in real assets.

Jonathan Grabel ,CIO at the Los Angeles County Employees Retirement Association, and his teammanage $85 billion in pension assets and another $5 billion in a trust for other post-employment benefits. Grabel says the current market conditions reinforce the need for a diversified portfolio that is best positioned from a return and risk perspective, factoring in liquidity to perform in multiple economic environments.

“Private assets aren’t one thing. They cover the full range of investments across financial markets across all geographies. Will private markets work over the long term? Yes, but where does the relative out- and underperformance come from? I don’t know…. It’s why we have a diversified portfolio that’s dynamic and resilient and durable,” he says.  

Reducing Risk and Rethinking Returns

Carreon says Addepar’s data show asset owners have been reducing their risk in private markets in the past few years, with fewer commitments to venture capital and growth equity, and more to traditional buyout and private credit.

Higher interest rates also offer opportunities to reduce risk without giving up return, Grabel says. LACERA’s current allocation to credit is 13%, and, in fiscal year 2025, it was the pension fund’s best-performing functional asset category, producing a 16.6% return.

Compared to public markets, private market returns have been lackluster. Jeff Mindlin, CIO at the $1.59 billion Arizona State University Foundation for a New American University, thinks underperformance and challenges in private markets are temporary, but he also believes that returns will not be as strong as they were several years ago. The ASU Foundation has 28.5% of its portfolio invested in private equity.

“I think the financial engineering element of private equity is probably not going to be as much of a driver of returns going forward. So, it’s going to take real, organic, revenue growth … to get those returns,” he says.

Carreon concurs. “In the zero-rate environment, a portion of your returns came from leverage and just [from] rising market multiples…. Today’s returns are going to be generated by the good old-fashioned way, by making good companies better,” she says.

That makes manager selection key. Addepar’s data show the top decile of private-equity managers have returned an internal rate of return of 27%, while the median manager has returned 12%.

More Competition Arriving

Another influence on returns going forward may be an influx of more participants in private markets as retail investors and defined contribution plan investors begin to invest.

Junkin says he does not expect money from defined contribution plans to flow into private markets in a meaningful way for a few years, but eventually such investment will have an impact.

“Essentially you’ll have a permanent buyer of assets that wasn’t present before. That’s likely to change a lot of the landscape in terms of prices are going to go higher, [and] expected returns are probably going to drift down,” he says.

He says focusing on specialized managers or those who are a little smaller or growth-focused could be one way to offset the impact of the new buyers since they will likely be from the larger plan providers and may focus on bigger managers.

If retail investors continue to flee markets during times of turmoil, there may be opportunities for patient capital, such as institutional asset owners, to take advantage of market dislocations, Junkin adds.

Mindlin, who is also a trustee on ASU’s 401(k) plan, says he is not sure that defined contribution plan trustees will be adding private market exposures to their plans anytime soon because of potential fiduciary concerns such as costs and necessary plan participant education.

“In the short-term, it’s probably been overstated how much it’s actually going to affect (plans),” he says.

As an allocator, he thinks retail investors’ involvement in private markets is likely a net negative for pension funds. “It might be good on the exit side in the near term, … but I don’t think it helps the excess returns that we’re going to see from the space,” he says.