RAYMOND PECOTIC: Where private markets fit with your investment portfolio and (importantly) where they don’t

It seems that for the past few years, the latest buzz in the investment world is private markets.

Proponents of these asset classes refer to historically higher long-term returns, often well into the double digits. They’ll also argue private markets provide a smoother return profile, limiting the investment volatility that otherwise comes with investing in assets listed on stock exchanges and subject to daily pricing.

It’s therefore not surprising that the result is a rise in interest from investors curious about this investment class once the domain of large family offices and institutional investors.

However, for most investors, long-term wealth is built the same way it always has been: through diversified, liquid portfolios designed to compound steadily over time.

Listed shares and property do the heavy lifting, coupled with high-quality fixed income and cash to smooth out bumps in market conditions and provide stability in times of volatility. Liquid, traditional investment portfolios are transparent, flexible, and easy to adjust when life changes. They allow investors to rebalance, release capital easily when needed, and respond to opportunities or risks without friction.

It is important to remember this foundation remains critical and that private markets, while appropriate in some cases, are not a replacement for this more conservative investment approach, and they are not designed to be.

Instead, private assets sit around the edges of well-established wealth, used selectively by people who already have scale, liquidity and patience, and who understand the trade-offs involved.

What we mean by private markets

Private markets include investments that aren’t traded on public exchanges. They include private credit, unlisted property, infrastructure, private equity, and even certain boutique assets like music royalties.

They tend to share a few defining characteristics. They are negotiated rather than traded. They are designed to be held for longer periods. And their value is driven more by underlying cash flows and operational outcomes than by daily market sentiment.

Why some investors look beyond the listed markets

As wealth grows, priorities often shift. For investors with substantial capital and surplus liquidity, the question becomes less about access and more about refinement. How can capital be put to work a little harder, without fundamentally changing the risk profile of the overall portfolio?

Private assets can sometimes offer that incremental benefit — not through higher risk for risk’s sake, but through exposure to different return drivers, more structured income streams, and longer investment horizons.

Used carefully, they can complement a traditional portfolio. But used indiscriminately, without proper due diligence or by investors blinded by the advertised returns of last year’s winners, they can create problems.

Understanding the trade-offs

Like all investments, nothing is guaranteed, and the quest for higher returns comes with its unique set of risks. So while at first glance, returns may seem the primary feature of private markets, their defining feature is not higher yields, it’s reduced liquidity.

Capital is typically committed for years, not months. There are fewer exit points. Pricing is less frequent, and outcomes are more dependent on manager quality and structure than on broad market movements.

None of that is inherently good or bad. But it means these investments are only appropriate for people who can afford to wait, who won’t need access to capital at short notice, and who already have diversification elsewhere.

This is why private markets are not a default solution. They are a deliberate choice, made after very careful consideration.

A simple way to think about it

An analogy we often use is driving.

A well-constructed, liquid portfolio is like cruising on the freeway at 100km/h. The engine is turning smoothly. There are exits everywhere. You can slow down, speed up, or pull off when you need to. You’re unlikely to blow anything up.

At the other extreme, some investors choose to redline the engine. Exciting, fast, but with a high chance of failure.

Private markets sit somewhere in between.

You’re driving at higher revs. The engine is working harder. There are fewer exits if you need to change direction. But if you understand the road, manage the speed, and respect the limits, you can arrive sooner without damaging the engine.

The key is knowing when that makes sense, and when it doesn’t.

Why access matters

The risks in private markets rarely come from the asset class itself. They come from poor structure, insufficient diversification, misaligned incentives, or inappropriate sizing within a portfolio.

This is why access alone is not enough. What matters is how exposure is selected, how it fits within the broader portfolio, and how risks are managed over time.

For the right investors, working with experienced advisers and specialist managers can make the difference between a thoughtful allocation and an illiquid headache.

Used carefully, in appropriate doses

Private markets are definitely not designed for everyone. But for investors with significant wealth, strong liquidity and a long-time horizon, they can play an important supporting role — not as a replacement for traditional investments, but as a complement used prudently and in measured proportions to provide a boost to long-term returns.

If you are a speculator who thrives on a high-octane investment environment, don’t be fooled. The goal is not excitement. It’s control, discipline, and incremental improvement.

And like any sophisticated tool, their value depends entirely on how they are used.

For investors considering whether private markets belong in their portfolio, the most important question isn’t what’s available, but what’s appropriate. And as always, seek the advice of a suitably qualified and objective advisor to assist with these decisions.

Raymond Pecotic is managing director of Empire Financial Group