According to UBS’s 2024 Global Family Office , private equity accounts for an average of 21% of family office portfolios worldwide. This allocation illustrates the role that unlisted assets now play in long-term wealth management strategies, alongside listed equities, bonds, and real estate.
However, this trend does not mean that private equity should become the main component of a portfolio. Like any asset class, it serves specific objectives and is part of a broader approach to developing a wealth management strategy.
So, how much importance should we give it?
The answer depends on many factors: investment objectives, investment horizon, liquidity needs, risk tolerance, and the overall composition of one's assets.
This article explains when private equity can be a suitable component of an asset allocation strategy, why institutional investors have been incorporating it for several decades, and how this asset class can complement—rather than replace—the other components of a portfolio.
Private equity is a component of a wealth management strategy, not a strategy in and of itself
The first question to ask yourself isn't, "Should I invest in private equity?" but rather, "What are my financial goals?"
In asset wealth, a strategy is generally developed in several steps.
Investors begin by defining their life goals, investment time horizon, and liquidity constraints. Only then do they determine how to allocate their assets across different asset classes.
Private equity fits into this framework. It does not replace listed stocks, real estate, bonds, or cash. It is a complementary asset class that can help meet certain wealth management objectiveswhen included in a diversified portfolio.
This is the approach taken by institutional investors. Their goal is not to favor any particular asset class, but to build a portfolio capable of meeting their long-term commitments.
An Allocation Before Making Investment Choices
Building wealth isn't just about adding up investments.
The goal is to establish a balanced allocation across several asset classes, each of which serves a specific purpose: preserving liquidity, generating income, seeking capital growth, or diversifying sources of value creation.
Private equity comes into play at this stage, when the investor's objectives and constraints have already been clearly defined.
An approach similar to that of institutional investors
Large institutional investors, such as pension funds, insurance companies, and family offices, always begin by establishing their investment policy.
In particular, they define:
- their long-term goals;
- their investment horizon;
- their liquidity needs;
- their acceptable level of risk.
Only then do they select the asset classes that will make up their portfolio, which may include private equity.
This approach can also serve as inspiration for private investors: sound asset allocation always begins with a comprehensive assessment of one’s overall financial situation, before selecting specific investments.
In what situations can private equity play a role in a wealth management strategy?
Private equity does not serve the same objectives as other asset classes. Its long-term investment horizon, illiquidity, and exposure to unlisted companies make it a component that may be appropriate in certain wealth management situations.
Its inclusion depends, in particular, on the investor's overall strategy, existing assets, liquidity needs, and ability to tie up a portion of their capital for several years.
When an investor has a long-term investment horizon
Private equity investments are generally intended to be held for eight to twelve years.
This time frame allows investment management firms to support companies in their growth before considering their sale. In return, it requires that the investor be able to tie up a portion of their assets for several years.
This asset class is therefore better suited to investors pursuing long-term wealth-building goals, such as preparing for retirement, growing their wealth, or passing it on to the next generation.
When there is a need for diversification
Diversification is one of the fundamental principles of wealth management.
By investing in unlisted companies, private equity provides exposure to value drivers that differ from those of traditional financial markets.
This complementary nature explains why institutional investors have been including private equity in their asset allocations for several decades, alongside publicly traded stocks, bonds, real estate, and other private assets. As highlighted in McKinsey’s Global Private Markets Report, private markets now occupy a structural role in the portfolios of major institutional investors.
Diversification does not mean increasing the number of investments, but rather allocating one's assets across asset classes whose performance may vary depending on economic cycles.
When liquidity needs are compatible
Unlike publicly traded stocks, private equity investments generally cannot be sold at any time.
This lower liquidity is one of the key characteristics of this asset class.
Before investing a portion of one’s assets in this, it is therefore essential to verify that short- or medium-term financing needs are already covered by other assets that can be liquidated more easily.
This analysis is one of the first steps taken by wealth management professionals when they are developing an asset allocation strategy.
When an investor is seeking exposure to the real economy
Private equity allows investors to invest directly in unlisted companies, often those in the growth, transformation, or succession phases.
Private equity firms work with these companies over several years to support their growth, international expansion, corporate governance, and acquisitions.
For some investors, this exposure to the real economy is an attractive complement to investments in public markets.
How much of your portfolio should be allocated to private equity?
There is no one-size-fits-all answer to this question.
The role of private equity depends on many factors, including:
- the investor's wealth management goals;
- his investment horizon;
- their level of risk tolerance;
- its liquidity needs;
- the composition of its existing assets.
For this reason, wealth management professionals generally think in terms of overall asset allocation, rather than seeking an identical percentage for all investors.
Two assets of equal value may therefore have very different allocations depending on the projects being pursued.
One component among others of asset allocation
Private equity complements other asset classes.
It does not replace cash, which meets liquidity needs; listed stocks, which offer liquid exposure to financial markets; or real estate, which often serves specific wealth-building objectives.
Each asset class serves a specific purpose within an investment portfolio.
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