Why Private Investments Enhance your Wealth Strategy

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Until relatively recently, private markets were the special province of institutional investors such as sovereign wealth funds, foundations and large family offices. By definition, these investments are not publicly traded and were largely unavailable to individuals except for a subset of ultra-high net worth investors able to meet the requirements for buying these assets.

The exclusivity no longer applies. Today, a range of factors—new technologies, product innovation, regulatory changes—have lowered the barriers to individuals significantly, but to buy private investments, they may need to be accredited investors, individuals who have a net worth of at least $1 million, and potentially qualified purchasers, who have at least $5 million in investments.

For investors who have accumulated substantial assets, private investments often offer the potential for higher returns, lower correlation with public market volatility and
substantial tax advantages. On the other hand, they also come with longer-term commitments compared to public investments.

Private equity, the largest portion of the private markets, encompasses a variety of non-publicly held companies, such as leveraged buyouts, growth equity and venture
capital. Private debt includes direct lending, distress financing and mezzanine financing. Real assets can also figure into the mix with real estate, natural resources and infrastructure.

Here are some of the factors to consider when deciding whether private investments might be a good fit for your portfolio.

Private investments outperform public markets

"Over the past three decades, private markets have consistently provided a superior return premium to that of public markets," says Christopher Ginter, director of private markets at Fifth Third Private Bank. "They could be your focus if long-term capital appreciation is a goal."

For example, private equity funds returned an average of 14.57% in the 20 years ending in the first quarter of 2024 compared with public market returns of 8.37% for the same period, according to research firm Cambridge Associates. Another sign of their demand: Global private market assets under management more than doubled from $9.7 trillion in 2012 to $24.4 trillion in 2023.

In addition to their positive return potential, private investments offer a chance to invest in companies that aren’t publicly traded such as startups, providing a head
start to private investors. They also have a low correlation with most other assets such as stocks and fixed-income securities, meaning that when the stock market declines, private investments don’t fall in lockstep with stocks or interest rates.

Key limitations of private investments

To be sure, private markets are not for investors looking for a source of short- or even middle-term liquidity. "Investment horizons are longer than those for public markets, and liquidity is far lower," says Ginter. "But their enhanced returns make them well suited for long-term wealth planning, generational wealth transfer and building a family legacy."

Moreover, as the public market universe continues to contract, it is becoming increasingly necessary to seek returns beyond stock exchanges to reap the full benefits of diversification. In the United States, the number of publicly traded U.S. companies has shrunk from 7,300 in 1996 to about 4,300 currently. In addition, fewer than 15% of companies with revenue over $100 million are publicly held, according to consulting firm Bain & Co., seriously limiting public investors’ exposure to the broader economy.

Reporting requirements

When weighing the suitability of private investments for your portfolio, keep in mind that reporting requirements are far less exacting than those for public markets and
that you will not have 24/7 access to performance data. While most private fund managers monitor their companies carefully and stay in close and frequent contact with them, quarterly pricing is typical, unlike public securities, which are marked to market daily.

That said, there is a perceived—and, for some, very meaningful—upside to the constraints on liquidity and transparency. Absent the ability to track prices as they change or to liquidate their holdings quickly, investors are more likely to hold private investments longer, overcoming the pitfalls often associated with frequent trading.

"By being patient and willing to forgo liquidity," says Ginter, "you have a greater chance of realizing your investment’s full potential over a longer time horizon."

How to get started

When speaking with your wealth management advisor about constructing your personally tailored portfolio, it’s important to keep in mind that considerations other than return profiles such as taxes might affect your investment decisions. "For most taxable investors, we typically recommend starting with private equity before integrating private credit and real assets," Ginter says. "The reason is simple: Equity offers a favorable blend of reasonable tax treatment and investment opportunity. However, investing in a mix of private and public asset classes may be the best approach overall."

For more information on whether private markets make sense for your wealth strategy, contact your Fifth Third Private Bank advisor to start a conversation.