Kevin Minas, CFA, MBA, CAIA | Institutional Portfolio Manager
Jeff House, CFA, FEA | Investment Counsellor, Private Wealth

When you hear investors talk about “the market”, what comes to mind? 

For most people, it’s public companies.

This is a reasonable assumption, as public markets are visible, liquid, and extensively covered. 

But this view captures only a fraction of where real economic activity happens. The overwhelming majority of sizeable companies, whether you’re measuring by revenue, employee count, or economic footprint, are privately held. This means they’re not accessible through traditional public market investments. 

Enter private equity.

Until recently, the way private equity was structured made it inaccessible to most individual investors. Minimum commitments were too large, lock-up periods too long, and the mechanics too complex for anyone without institutional infrastructure behind them. 

But this is changing.

Structural innovations in fund design have significantly reduced the barriers to entry that once kept this asset class out of reach for all but large institutions and high-net-worth investors. The practical question is no longer whether private equity is accessible, it’s whether it belongs in your portfolio and on what terms.

Across two articles, we’ll provide you with the insight you need to understand what private equity is, how to access it, and how to choose a manager.

What is Private Equity?

Private equity involves making long-term investments in privately held companies in return for an ownership stake that is not listed or traded on a public exchange. This illiquidity is a key distinction between public and private equity, as investments are typically expected to be held for multiple years. Investors may be able to exit earlier through a secondary sale, though this process is often time-consuming and may require selling at a discount. 

Private equity sits alongside real estate, infrastructure, and private credit within the broader category of alternative investments. It’s less a single strategy and more a spectrum of approaches, each suited to different types of companies and stages of development, and varying considerably in risk profile, return potential, and how they fit within a portfolio.

Understanding Private Equity’s Different Strategies 

Across all strategies, private equity managers add value by:

• Working directly with the companies they invest in
• Providing capital
• Offering operational expertise
• Building strategic relationships
• Applying their financial skills

This hands-on involvement is one of the key ways that private equity generates returns and will be explored further in the second article in our series.

Why Private Equity Has the Potential to Outperform

A quick Google search will show that private equity has historically exhibited strong returns, materially outperforming public market equities net of fees over a market cycle. 

But knowing this is not enough. What’s most important is understanding why.

The drivers are structural and help explain why the return potential is real rather than a product of favourable conditions alone:

• Direct influence on the business: Unlike public equity investors, who have little ability to influence the companies they own, private equity investors, particularly those with a controlling position, can set a company’s strategic direction.  Their ability to provide hands-on operational, financial, and strategic support in ways not available in public markets is one of private equity’s most meaningful sources of value creation.
• An illiquidity premium: Private companies tend to be smaller and have less access to traditional capital markets than their public counterparts. In exchange for accepting illiquidity, investors are compensated with a return premium.
• Greater alignment between owners and management: Private equity sponsors emphasize management compensation packages tied directly to the long-term success of the business. This reduces the misalignment between management incentives and investor interests that’s more common in public companies.
• A larger opportunity set: There are far more private companies than public ones.
• High-growth trajectory businesses: Many private equity target companies are in the high-growth phase of their business life cycle, where the potential for value creation is greatest. Accessing these businesses before they reach public markets, or before that growth is fully reflected in their valuation, is a key advantage of the asset class.
• Acquiring assets at lower valuations: Smaller private companies tend to be priced at lower valuation multiples than comparable public businesses. When the investment managers who run private equity funds, known as general partners, eventually take portfolio companies public or sell them, they often do so at higher multiples, capturing the gap as a return.
• The role of leverage in private equity: Debt can be used in the acquisition structure to enhance equity returns. It also has a secondary benefit: introducing debt obligations can impose financial disciplines on company management, creating an incentive to run the business efficiently.

Private equity returns can vary considerably by strategy, manager, and vintage year. Past performance is not a reliable indicator of future results. Investors should enter the asset class with this in mind, using realistic expectations and a time horizon measured in years, not quarters.

It’s also worth noting that the industry has moved through a period of more compressed returns in recent years, as exit activity slowed and financing conditions tightened. These are normal cyclical features of the asset class, not structural failures. For investors that take a long-term perspective, recent history  doesn’t negate the drivers of return discussed above.

The Portfolio Diversification Argument

Beyond the return premium alone, private equity offers portfolio diversification benefits that are distinct from public equities.
The most straightforward benefit is access. Private equity gives investors exposure to companies and sectors unavailable in public markets, such as earlier-stage businesses, niche industrials, and founder-led companies that have chosen to stay private. For investors whose portfolios are largely public, private equity can meaningfully broaden the opportunity set.

Private equity also behaves differently from public markets in ways that matter for portfolio construction. Private assets are typically valued on a quarterly basis rather than through daily market pricing, so this mutes the sharp short-term swings that characterize public equity portfolios. 

Valuation policies are also typically more conservative, with range-bound valuation multiples applied consistently through the market cycle. 

Together, these three factors reduce the extreme pricing movements, both upward and downward, that are often seen in public markets.

To illustrate this, consider three versions of the same portfolio: The starting point is a traditional balanced portfolio of 60% public equities and 40% public bonds. In the two alternative scenarios, a 5% and 15% allocation to private equity is introduced, sourced from the public equity portion of the portfolio. As the chart below shows, adding private equity materially improved returns while also lowering realized risk. For investors with a long-term horizon, the difference in financial outcomes can be significant.
 

Who Invests in Private Equity?

Large institutional investors have long recognized the benefits of private equity. Major pension funds, endowments, sovereign wealth funds, insurance companies, and family offices all routinely allocate to the asset class. These institutions have the scale, internal expertise, and long time horizons that make private equity a natural fit.

In Canada, the Canada Pension Plan Investment Board (CPPIB) has been an industry leader in building a diversified, global private equity program through a combination of primary fund, direct, co-investment, and secondary allocations, managed both in-house and externally.

Until recently, individual investors had little direct access to private equity, regardless of their investment objectives or risk tolerance. However, through innovations in fund structures, private equity is becoming increasingly accessible to high-net-worth investors.

The Honest Trade-offs

Private equity is not the right asset for every investor or every portfolio. The trade-offs are real and are worth stating plainly:

• Illiquidity is the most significant trade-off. Private equity investments are meant to be held for years, and the ability to exit early is limited. For investors with long-term goals, however, this may be a risk they’re well-positioned to bear, as longer holding periods naturally align with long-term investment objectives.
• Complexity is inherent. Private markets lack the transparency of public ones, and valuations are less frequent and less precise. Understanding what you own and how it’s performing requires more engagement than monitoring a public equity fund.
• Capital risk exists in any equity investment, and more acutely in private equity. Early-stage, venture capital-backed companies carry a higher probability of loss, and even buyout strategies, which target mature businesses, are not immune to deterioration.
• Leverage, particularly in buyout strategies, amplifies both gains and losses. It’s a tool, not a guarantee, and investors need to understand how it’s being used in any fund they consider.

None of these trade-offs are reasons to avoid the asset class, but they do mean private equity should be approached thoughtfully, with a clear-eyed understanding of what you’re accepting and what you’re gaining. For investors with the right time horizon, liquidity position, and risk tolerance, the potential benefits may outweigh the complexity.

The Question Worth Asking, And Answering

The days of private equity being exclusively reserved for the largest institutions are over.

The structural innovations that have made it more accessible are meaningful, and the case for including it in a long-term portfolio, as part of a thoughtfully constructed allocation, is well-founded.

For most high-net-worth investors, the question isn’t “does private equity belongs in my portfolio”? It’s “do I have access to it through the right managers, in the right structure, at a fee level that leaves enough of the return premium to make the complexity worthwhile”?

This question is worth examining carefully, and it begins with understanding why not all private equity is created equal.

Keep an eye out for the next in this series, How to Access Private Equity: Manager Selection, Structure, and Fees, to learn more.

 

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