Now Is the Time to Rethink Portfolios
The turn of the calendar year tends to be a time when we take stock of our lives, our health, and our relationships. We set goals and begin to make changes. Likewise, this is a time to take stock of one’s financial health, preparing portfolios for the markets ahead of us, including examining the central role that private markets may play in helping drive a resilient asset allocation.
These past three years have presented financial professionals and their clients with widely divergent market environments. 2021 reflected exuberance amid stimulus and an anticipated recovery from Covid-related disruptions. Next, in 2022, stocks’ and bonds’ diversifying properties were little benefit in that year’s great financial tightening, which caused bonds to rack up their worst-ever annual performance amid surging inflation and widespread losses in stocks.1 Then, not to be outdone, 2023’s markets came in like a lamb but roared like a lion to the finish. The result was a lot of volatility and inconsistent correlation in major public asset classes.
Another commonality of all three years: strong risk-adjusted performance in the private markets.2 In each of these years, private markets afforded opportunities to resist the dominant trend and/or pursue outperformance, income and risk reduction. Private credit offered positive absolute returns in all three environments, including income that adjusted higher to rising interest rates in 2022. Private equity and real estate were also attractive areas with less exposure to the higher volatility of their public counterparts.3
Blackstone has navigated many market and economic cycles in its nearly four decades, delivering for our clients and their end investors in each cycle. Today, nearly all of Blackstone’s major businesses are leaders in their respective asset classes. The firm takes a long-term view in a short-term world, employing a thematic approach powered by rigorous underwriting. Ample dry powder or cash to invest allows the firm to time its entry points and pursue the kind of value-add investing that we think is increasingly rare. Blackstone’s investment approach is patient, not passive.
For individual investors, adding private investments to portfolios can be a game-changer. But any program of change requires understanding and education. Blackstone’s Private Wealth Solutions group is committed to providing excellent education and service to our partners. We work with financial professionals to build better awareness of the attributes that private markets can bring to portfolios: investing in assets that have shown lower correlation to public markets, for instance. Or access to unique opportunities with outperformance potential, lower volatility, and a history of attractive risk-adjusted returns.
Part of the process is helping investors understand that private markets represent the vast majority of companies and properties. Some 86% of companies globally with revenues of $250 million or more are privately held, with the remaining 14% consisting of the public companies which dominate the airwaves and have significant visibility.4 In fact, the number of public companies has shrunk dramatically in recent decades and is now around 4,000, a little more than half 1990s levels.5 Proportions of privately held assets are similarly lopsided in commercial real estate, and private credit has grown rapidly to represent approximately a quarter of the sub-investment grade credit universe.6
To a significant degree, by allocating to assets such as private credit, private equity, and private real estate and placing them at the core of their portfolios, we think investors are realigning to the way the world works and the way the world is.
Today, advisors and other financial professionals have greater access to more open-ended private investment funds across a number of asset classes, coupled with more education and better technology. This has led many to consider these investments as fundamental building blocks in a well-constructed portfolio in the same way that institutional investors might consider them. We expect the adoption of private market investments will grow from here.
We welcome investment professionals to reach out about educational opportunities in private markets. Financial professionals in select regions can explore our Essentials of Private Markets series, which provides an introduction to core private asset classes through videos, a curated web experience, and/or live engagement. Also, please check out our on-demand Continuing Education platform which exists to help financial professionals in select regions meet their professional education requirements in a quick, easy-to-use format.
I have great optimism for what 2024 can bring on multiple levels. We remain grateful to our clients for the trust they put in us as stewards of their capital in an ever-changing marketplace.
Joan Solotar
Global Head, Private Wealth Solutions
- Source: Morningstar, Bloomberg Aggregate Bond Index and S&P 500 Index.
- Source: Comparison of the S&P 500 Index and Bloomberg Aggregate Bond Index to the following: Cambridge US Private Equity Index, Cliffwater Direct Lending Index, and NFI-ODCE Index, Dec. 31, 2020-June 30, 2023, covering the latest period available for all indexes.
- Private credit, private equity, and private real estate observations are based on the same data comparisons shown in footnote 2.
- Source: Capital IQ; based on global data available in Capital IQ’s database, August 2023.
- Source: Center for Research in Security Prices, CRSP Count Q2 2023 Update.
- Source: For real estate, NAREIT, “Estimating the Size of the Commercial Real Estate Market,” June 30, 2021; for private credit, Preqin, Credit Suisse, as of Sept. 30, 2022, latest available.
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