INSIDE ALTERNATIVES

Portfolio construction with private equity

Key takeaways

  • Private equity expands the investable equity universe beyond listed markets, offering access to companies, growth opportunities and value creation pathways unavailable through public markets alone.
  • A private equity allocation is ultimately a portfolio of strategies. Investors can combine buyout, growth, venture capital, secondaries and fund-of-funds exposures to pursue different risk and return objectives.
  • The benefits of private equity depend on how it is incorporated into the portfolio. Allocation size, funding approach and portfolio objectives can materially influence risk and return outcomes.
  • Thoughtful implementation is critical. Investors should assess liquidity, time horizon, diversification, governance and manager selection alongside performance expectations.

Introduction

Private equity has become increasingly relevant to portfolio construction as the equity opportunity set has expanded well beyond public markets. Investors relying only on public equities may be missing a substantial portion of profitable businesses and potential long-term value creation. Private equity can help broaden a portfolio’s growth exposure through private company ownership, active management and manager-driven value creation. To learn more about what private equity is and how it works, see our Introduction to Private Equity.

Based on the Preqin global private equity closed-end fund index, private equity has delivered competitive long-term cumulative performance relative to major public equity benchmarks, while offering exposure to companies and value creation pathways not fully represented in public indices.

Figure 1: Cumulative return of public equity versus private equity

Cumulative growth of $100 from December 2010 to December 2025. Global private equity grew to approximately $770, outpacing global large caps, global small caps and emerging markets.

Source: Preqin and BlackRock, with data from March 31, 2010, to Dec. 31, 2025. Global Private Equity represented by the Preqin Global Private Equity Closed-end Fund Index. Global Large Caps represented by the MSCI ACWI Total Return Index, Global Small Caps represented by the MSCI World Small Cap Total Return Index, Emerging Markets represented by the MSCI Emerging Markets Total Return Index. Past performance is not indicative of current or future results. Indexes shown for illustrative purposes only. It is not possible to invest directly in an index.

1. What are the key private equity strategies?

Private equity is a multi-strategy market with different investment approaches, company stages, return drivers, risk profiles and implementation considerations. Understanding these differences is important because a private equity allocation can look very different depending on whether it is focused on buyouts, venture capital, growth equity, secondaries or fund-of-funds and others.

The return profile varies across strategies, with 10-year annualized returns ranging from 11-14%, as shown in Figure 2. For investors, the key question is not simply whether to allocate to private equity, but which private equity strategies best align with their return objectives, risk tolerance, liquidity needs and total portfolio goals. Buyout is often used as a core private equity allocation because it focuses on more mature companies and operational value creation. Venture capital and growth equity can provide access to innovation and company expansion, but they often come with higher dispersion and longer realization periods. Secondaries may help provide more seasoned exposure, while fund-of-funds can offer diversified access across managers and vintages. Meanwhile, manager selection matters more because dispersion across managers is much wider in private equity than in public markets.

Diversification across these factors can help build a more resilient portfolio. The objective is not just to access the asset class, but to build a portfolio that can perform through different market environments.

Figure 2: Private equity market breakdown by strategy

Private equity market breakdown showing buyout with the highest assets under management and 10-year net IRR, while venture capital has the most funds.

Source: Preqin and BlackRock, with data as of Sep. 30, 2025. Venture Capital: Preqin Global venture capital funds including start-ups and seeds; Growth: Preqin global growth funds; Buyout: Preqin global buyout funds; Secondaries: Preqin global secondaries funds; FoF & Others: Preqin global fund of funds including co-investment, multi-manager and hybrid funds.

2. How can investors integrate private equity into a public market portfolio?

In portfolio construction, private equity should be treated as an extension of equity risk, not a diversifier that is fully independent from public equity markets. Like public equity, private equity is exposed to company fundamentals, earnings growth, valuation cycles and economic conditions. Unlike public equity, returns are shaped more directly by active ownership, operational improvement, manager selection, capital structure decisions and the timing of exits and distributions.

Liquidity is a key consideration when adding private equity to a portfolio. Because private equity cash flows are delayed and typically uneven, these allocations should be funded from capital that can tolerate these constraints. Investors should also maintain sufficient liquid assets to meet capital calls, rebalance the broader portfolio and continue making commitments across market cycles, including periods when distributions slow.

Although private equity shares common risk drivers with public equity, it can still improve whole-portfolio construction through its differentiated return sources and interaction with broader asset classes. Its diversification benefit comes not from being fully independent of equity risk, but from broadening the portfolio’s growth exposure beyond public markets.

As shown in Figure 3, private equity strategies remain connected to equity risk (0.8 correlation between private equity and the S&P 500 and a traditional 60/40 portfolio). However, private equity has low correlations to traditional diversifiers such as U.S. Treasuries, the U.S. Aggregate Bond Index and gold. These lower correlations underscore the importance of considering private equity an extension of public equity, which can reduce the overall portfolio risk. The asset class is a growth allocation that can broaden the sources of equity-like returns while interacting differently with defensive assets.

Figure 3: Correlation matrix

Correlation matrix comparing a 60/40 portfolio with public and private markets, showing generally higher correlations among private equity strategies and lower correlations with bonds and gold.

Source: Preqin and BlackRock, analysis period from Jan. 1, 2010 to Dec. 31, 2025 and with quarterly frequency. 60/40 ACWI/AGG: 60% MSCI ACWI Index /40% Bloomberg US Aggregate Bond Index. S&P500: S&P 500 Index, 3-10Y US Tsy: Bloomberg US Treasury 3-10 years total return index. US AGG: Bloomberg US Aggregate Bond Index; Gold: S&P Global Gold Index. HF: HFRI Hedge Fund Diversity Index. PE Index: Preqin Global Private Equity Closed-End Fund Index;  Venture Capital/VC: Preqin Global Venture Capital Closed-End Fund Index; Growth: Preqin Global Growth Closed-End Fund Index; Buyout/BO: Preqin Global Buyout Closed-End Fund Index; Fund-of-Funds/FoF & Others: Preqin Global Fund of Funds Closed-End Fund Index; Secondaries: Preqin Global Secondaries Closed-End Fund Index; Preqin Index return data are de-smoothed by BlackRock for private markets using the Geltner Technique.

3. How can investors source and size private equity allocation in portfolios?

Traditional portfolios (60% public equity/40% fixed income) have become less efficient as public fixed income has provided less reliable hedging power against public equity risk. Including private equity can improve portfolio efficiency by introducing additional return premium and potential diversification beyond public markets. The appropriate allocation should be identified by solving for the investor’s objective for their whole portfolio, such as higher return, lower risk, lower tracking error or maximum Sharpe ratio, while considering liquidity needs and implementation constraints.

  • Within this traditional 60/40 portfolio framework, two key portfolio construction decisions investors must make are: how much to allocate to private equity and how to fund it. Funding source: As shown in Figure 4, using a de-smoothed1 private equity index, the impact of adding private equity varies meaningfully by funding source. Funding from public equity would have improved historical total return while reducing portfolio risk, while funding from fixed income would have increased risk more meaningfully by reducing the portfolio’s defensive allocation and increasing exposure to equity-like risk. A blended funding approach would have raised risk only modestly while improving risk-adjusted returns. Investors should, therefore, treat the funding source as a key portfolio construction lever to align private equity exposure with their risk budget, liquidity needs and total portfolio objectives.
  • Allocation amount: This needs to be evaluated from a total portfolio perspective. Figure 4 illustrates how a traditional 60/40 portfolio’s historical risk and return would have changed as 10% to 60% of the portfolio was reallocated to private equity while the fixed income allocation remained unchanged. This is demonstrated through sensitivity analysis and not suggested targets. Investors should determine their allocation based on their liquidity, pacing, governance and concentration constraints.

Figure 4: Hypothetical portfolio construction with private equity

Hypothetical portfolios show how adding private equity to a traditional 60/40 portfolio may shift expected risk and return depending on whether allocations come from public equity or fixed income.

Source: Preqin and BlackRock, analysis period from Jan. 1, 2010 to Dec. 31, 2025 with quarterly frequency. Traditional 60/40: 60% MSCI ACWI Index / 40% Bloomberg U.S. Aggregate Bond Index. PE: Preqin Global Private Equity Closed-end Fund Index. 10% PE-60%PE sourced from public equity: Portfolios with 40% Bloomberg U.S. Aggregate Bond Index and reallocating 10% to 60% from MSCI ACWI Index to Preqin Global Private Equity Closed-end Fund Index. High PE allocations are shown for sensitivity analysis and may not be suitable for many investors given their liquidity, pacing, governance and concentration constraints; 10%PE-20%PE sourced from public fixed income: Portfolios with 60% MSCI ACWI Index and reallocating 10% and 20% from Bloomberg U.S. Aggregate Bond Index to Preqin Global Private Equity Closed-end Fund Index; 20% PE from public equity and fixed income: 50% MSCI ACWI Index/30% Bloomberg U.S. Aggregate Bond Index /20% Preqin Global Private Equity Closed-end Fund Index. Preqin Index return data are de-smoothed by BlackRock for private markets using the Geltner technique. Index performance is for illustrative purposes only. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Hypothetical performance is for illustrative purposes only. It does not represent real performance and often benefits from hindsight. Since trades were not executed, it cannot reflect market risks like interest rate changes or lack of liquidity, nor does it include trading costs. Many factors affecting actual results cannot be accounted for in hypothetical data, and can adversely affect actual results.

Case study: Applying private equity strategies

We illustrate a building-block approach to incorporating private equity into a portfolio that uses buyout for core exposure, growth and venture for innovation and expansion, secondaries for seasoning and liquidity management and fund-of-funds for access and diversification when direct manager selection is constrained.

As shown in Figure 5, our analysis suggests that reallocation from a traditional 60/40 portfolio to a hypothetical 50/30/20 portfolio that includes any private equity strategy would have increased total returns. Other findings:

  • Venture capital, buyout and growth equity would have improved risk-adjusted returns, but with higher absolute risk and higher historical returns.
  • Secondaries and fund-of-funds would have reduced total portfolio risk, making them useful for investors seeking private equity exposure with a more controlled risk profile.
  • A diversified allocation across multiple private equity strategies would have maintained a similar level of total portfolio risk while enhancing overall returns. Combining strategies can therefore help investors improve risk-adjusted performance relative to a traditional 60/40 portfolio without materially increasing total portfolio risk.

Figure 5: Hypothetical portfolios’ return and risk comparison

Hypothetical portfolios compare annualized return and risk across different portfolio allocations.

Source: Preqin and BlackRock, analysis period from Jan. 1, 2010, to Dec. 31, 2025, with quarterly frequency. Traditional 60/40: 60% MSCI ACWI Index / 40% Bloomberg U.S. Aggregate Bond Index. Portfolio with venture capital, Portfolio with growth, Portfolio with buyout:, Portfolio with secondaries, Portfolio with fund of funds: The allocation of these four portfolios are the 50% MSCI ACWI Index/30% Bloomberg U.S. Aggregate Bond Index/20% of each corresponding Preqin Private Equity Closed-End Fund Indices by different strategy. Portfolio with Multi-strategy: 50% MSCI ACWI Index/30% Bloomberg U.S. Aggregate Bond Index/7% Preqin Private Buyout Closed-End Fund Index/1% Preqin Private Growth Closed-End Fund Index/1% Preqin Private Venture Capital Closed-End Fund Index/1% Preqin Private Fund-of-Fund Closed-End Fund Index/10% Preqin Private Secondaries Closed-End Fund Index. Preqin Index return data are de-smoothed by BlackRock for private markets using the Geltner technique. Index performance is for illustrative purposes only. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Hypothetical performance is for illustrative purposes only. It does not represent real performance and often benefits from hindsight. Since trades were not executed, it cannot reflect market risks like interest rate changes or lack of liquidity, nor does it include trading costs. Many factors affecting actual results cannot be accounted for in hypothetical data, and can adversely affect actual results.

Conclusion

Private equity can play an important role in portfolio construction by expanding equity exposure beyond listed markets and providing access to differentiated sources of long-term value creation. However, the asset class should be evaluated with appropriate context: Private equity is not a single strategy; performance should be assessed using multiple metrics, and implementation requires careful consideration of liquidity, diversification, manager selection and time horizon.

For suitable investors, the key question is not simply whether to include private equity, but how to size, fund, diversify and monitor the allocation within a total portfolio. When implemented thoughtfully, private equity can serve as a durable complement to public markets and a meaningful component of a modern growth allocation.