Strengthening modern portfolios with private markets

At a glance:

• Start with your goals: Private markets allocations should align with client objectives, including income needs, growth targets, and liquidity constraints.
• Traditional stock and bond portfolios are under pressure from shifting market dynamics and elevated inflation, increasing the need for diversified return sources.
• Private market allocations designed for specific outcomes: Across our income, balanced, and growth portfolio models, adding private markets may enhance risk-adjusted outcomes.
• A better way to measure risk: An economic risk framework helps provide a more comprehensive view of portfolio risk.

Why are investors looking beyond the traditional 60/40 portfolio?

For decades, portfolios built on public equities and fixed income have provided a reliable foundation for investors. Today, that model is under increasing pressure.

The diversification benefits of stocks and bonds have become less consistent, particularly during periods of market stress when correlations can rise unexpectedly. At the same time, equity market performance has grown more concentrated, with a narrow group of companies accounting for an outsized share of returns.

These dynamics have made it more challenging to generate stable income, manage downside risk, and achieve long-term growth using public markets alone. As a result, advisors are increasingly evaluating additional sources of potential return.

What role can private markets play in portfolio construction and diversification?

Private markets can serve as a complementary allocation, broadening the opportunity set and introducing differentiated return drivers that are less reliant on public market conditions.

At BlackRock, we view private markets as a way to help enhance portfolio construction by:

• Expanding sources of return
• Improving diversification
• Increasing overall portfolio efficiency

In an environment where correlations are heightened and AI as a theme dominates market risk, private markets can unlock areas of the market such as music and sports royalties that can bring truly uncorrelated risk with attractive yield characteristics.

What should investors consider before investing in private markets?

As with any allocation, implementation should be grounded in client-specific considerations. Time horizon, liquidity needs, and risk tolerance remain central to determining the appropriate role for private markets within a portfolio.

• Time horizon: Private investments are typically long-term in nature and best suited for capital that can remain invested over multiple years.
• Liquidity: These assets are generally illiquid, underscoring the need to maintain sufficient liquidity for near-term obligations.
• Portfolio integration: Private markets should complement existing allocations, with sizing aligned to overall portfolio objectives and constraints.

Risk-Return Frontier Analysis:
Adding a 20% private markets allocation to public portfolios^2,3,4 (9/30/2010 – 9/30/2025)

• Income portfolios: enhancing yield with private markets
  Income-oriented investors often face a trade-off between yield and risk in traditional fixed income markets. Incorporating private market strategies, particularly in private credit, can help address this challenge. In our analysis, reallocating 20% of an investment-grade bond portfolio to a diversified mix of private markets increased returns by approximately 1.11%, while maintaining a comparable level of risk.

• Balanced portfolios: improving diversification and efficiency
  Balanced portfolios seek to combine stability and growth, typically through a mix of equities and bonds. Private markets can enhance this approach by adding a differentiated source of return and layer in an element of growth with private equity exposure. A 20% allocation to private equity, private credit, and real assets improved returns by approximately 1.17%, with only a modest increase in overall risk.

• Growth portfolios: expanding long-term return drivers
  Growth-oriented portfolios are often heavily concentrated in public equities, increasing sensitivity to market cycles and concentration risk. Private markets can broaden the opportunity set and support long-term capital appreciation. In our analysis, introducing a 20% private markets allocation alongside public equities increased returns by approximately 1.22%, while maintaining similar levels of economic risk.

Why does measuring risk matter in private markets investing?

Incorporating private markets into portfolio construction requires a more nuanced approach to risk measurement. Because private assets are valued less frequently, reported volatility can understate their true risk and correlation characteristics. To address this, we use an economic risk framework that estimates how private assets would behave if priced continuously. This approach provides a more comprehensive view of portfolio dynamics, helping advisors better understand how private and public exposures interact across different market environments. Our public and private market assumptions are informed by datasets from Preqin for private asset performance, alongside BlackRock’s Aladdin and eFront systems to enable comprehensive portfolio construction, risk modeling, and scenario analysis across both liquid and illiquid exposures.

The bottom line: How can private markets strengthen modern portfolios?

As portfolio construction evolves, the case for incorporating private markets continues to strengthen. Across income, balanced, and growth portfolios, our analysis shows that private markets can enhance diversification and improve risk-adjusted outcomes. For advisors, they represent an increasingly important tool in building resilient portfolios designed to meet a broader range of client objectives over the long term.