Overview 

While public equity investors enjoyed strong returns over the last two years, the concentration of those returns nonetheless suggests the need for greater equity diversification going forward. That is one reason why investors—including individual investors—are becoming more focused on incorporating private market assets to complement their public equity holdings, one of which includes private equity (PE).

As the name suggests, Private Equity generally involves equity investments in companies that are not publicly traded. It is the leading private market asset class, accounting for over 67% of the $15.1 trillion global private asset market,¹ a testament to its ability to tap into the world’s growth engine—private companies. Institutional investors have long relied on private equity as a cornerstone of their portfolios, leveraging its capacity to deliver robust returns and foster long-term growth. However, in recent years PE has become more accessible to individual investors, with new opportunities and vehicles in which to invest. Although average individual investor allocations to PE are still less than 2%, we believe that we are on the brink of a paradigm shift, with individual investors increasingly embracing private equity, thanks to a deeper understanding of the potential benefits and improved access.

A Broader Opportunity Set 

PE offers access to a broader investment universe. Globally, more than 85% of companies with revenues exceeding $100 million remain privately owned. Therefore, investors deploying capital into both private and public equity markets are utilizing a larger investment universe, resulting in greater diversification and potential for improved investment outcomes.

At the same time, fewer companies are now going public because the trade-offs have been tilted toward staying private. Companies planning to go public face regulatory burdens and compliance costs, while firms in the knowledge-based economy may hesitate to reveal proprietary information. Meanwhile, companies now can access deeper capital markets, with the size of private credit doubling and private equity tripling since 2003.

Put simply, more and more companies have decreased dependency on public money. This helps explain why the number of public companies has dropped this century, while PE-backed companies have steadily grown. Consequently, with more capital competing for a dwindling number of stocks in the public markets, there’s a growing need to diversify into private equity and explore opportunities beyond the increasingly concentrated public equities.

Potential Benefits of Private Equity 

PE has the potential to strengthen portfolios with better risk-adjusted returns and higher absolute returns compared to public equities as well as other alternative investments, along with enhanced portfolio diversification. Indeed, PE has historically provided investors with strong performance relative to public equities, whether looking at performance for the past three, five or 10 years. 

The reasons behind this historical outperformance are many and are not limited to: 

• Active involvement. Private equity General Partners (GPs) play a hands-on role in driving value creation within portfolio companies through financial and operational improvements. In contrast, public investment fund managers typically adopt a more passive approach, with minimal involvement in the day-to-day operations of the companies in which they invest.
• Long-term focus. Private firms prioritize long-term value creation and are better positioned to make future-oriented investment decisions. Conversely, public firms often face pressure to meet short-term earnings expectations, which can lead to suboptimal valuation and decision-making strategies driven by immediate performance concerns.
• Market inefficiencies. Relative to public markets, private equity markets are more complex, less transparent, and have fewer investors to arbitrage away market inefficiencies, potentially creating conditions for additional returns.

The Bottom Line

To be clear, we believe that investors should consider PE alongside public equity, and not as a replacement for public stocks. While some investors may focus on improving their portfolio’s return potential, others prioritize private equity’s ability to diversify traditional equity and bond holdings. Either way, investing in PE alongside public stocks aims to offer an effective way to enhance equity returns in a portfolio. And individual investors now increasingly have the ability to access this critical asset class and achieve its benefits.

ENDNOTE 

1 Preqin as of Q3 2024. 

A WORD ABOUT RISK 

As an asset class, private credit is comprised of a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due to their typical opportunistic focus on companies with limited funding options, in comparison to their public equivalents. Because private credit usually involves lending to below investment grade or non-rated issuers, yield on private credit assets is increased in return for taking on increased risk. Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability and energy conservation policies. Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or prediction of investment performance. Diversification does not guarantee a profit or protect against loss. Views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy. Opinions expressed herein are current opinions of Brookfield, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance, and the value of investments and the income derived from those investments can fluctuate. 

FORWARD-LOOKING STATEMENTS 

Information herein contains, includes or is based on forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements. It is not intended to provide an overview of the terms applicable to any products sponsored by Brookfield Corporation and its affiliates (together, “Brookfield”). Information and views are subject to change without notice. Some of the information provided herein has been prepared based on Brookfield’s internal research, and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein, including information that has been provided by third parties, and you cannot rely on Brookfield as having verified any of the information. The information provided herein reflects Brookfield’s perspectives and beliefs as of the date of this commentary.

INDEX PROVIDER DISCLAIMER 

The quoted indexes within this publication are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. There may be material factors relevant to any such comparison, such as differences in volatility and also regulatory and legal restrictions between the indexes shown and any investment in a Brookfield strategy, composite or fund. Brookfield obtained all index data from third-party index sponsors and believes the data to be accurate; however, Brookfield makes no representation regarding its accuracy. Indexes are unmanaged and cannot be purchased directly by investors. 

Brookfield does not own or participate in the construction or day-to-day management of the indexes referenced in this document. The index information provided is for your information only and does not imply or predict that a Brookfield product will achieve similar results. This information is subject to change without notice. The indexes referenced in this document do not reflect any fees, expenses, sales charges or taxes. It is not possible to invest directly in an index. The index sponsors permit use of their indexes and related data on an “as is” basis, make no warranties regarding the same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their index or any data included in, related to or derived therefrom, and assume no liability in connection with the use of the foregoing. The index sponsors have no liability for any direct, indirect, special, incidental, punitive, consequential or other damages (including loss of profits). The index sponsors do not sponsor, endorse or recommend Brookfield or any of its products or services. Unless otherwise noted, all indexes are total-return indexes.

INDEX DEFINITIONS 

The Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter. 

The Preqin Real Estate Index captures in an index the return earned by investors on average in their private real estate portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter. 

The Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter. 

The Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements. 

The FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market capitalization-weighted total-return index that consists of publicly traded equity REITs and listed property companies from developed markets. 

The FTSE Global Core Infrastructure 50/50 Index gives participants an industry-defined interpretation of infrastructure and adjusts the exposure to certain infrastructure subsectors. The constituent weights are adjusted as part of the semi-annual review according to three broad industry sectors: 50% Utilities; 30% Transportation, including capping of 7.5% for railroads/railways; and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization. 

The ICE BofA U.S. High Yield Index tracks the performance of U.S.-dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market.

The ICE BofA Merrill Lynch Global High Yield European Issuers Non-Financial 3% Constrained Ex Russia Index is a sub-index that contains all securities in the broader index except those from financial issuers or with Russia as their country of risk but caps issuer exposure at 3%. The index is rebalanced monthly. The index is USD hedged. 

The MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. 

The S&P 500 Index is a market-cap weighted equity index of 500 widely held, large-capitalization U.S. companies. 

The Morningstar LSTA US Leveraged Loan Index is a market-value weighted index designed to measure the performance of the US leveraged loan market. 

The Nasdaq Index is a market-cap weighted index tracking companies traded on the Nasdaq stock market.

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