Ian Lyu

A new report from independent global investment consultancy, bfinance, has identified the key challenges in incorporating private market investments into strategic asset allocation models. Given the absence of robust benchmarks for returns and volatility in private markets, liquidity dynamics and market structures shifting and private market allocations growing, investors must rethink their approach to private assets in their asset allocation.

With private equity now representing 10% of public market capitalisation, asset owners must refine their approaches as they face challenges in the rapid growth in private market asset classes, decline in IPO activity, the long-standing downward trend in private equity fund distributions, and the ways in which GPs have pivoted towards other forms of exit.

Nearly half of the participating investors in bfinance’s recent Global Asset Owner Survey (47%) are expecting a reduced illiquidity premium. The report suggests that private market investors should assume a 2% premium for buyout funds and a 3% premium for venture capital (geometric return). This shift challenges the assumption that private market investments will consistently outperform public markets and raises questions about appropriate risk-adjusted returns.

The report also highlights the diversification benefits of private markets. With IPO activity in decline and more companies opting for take-private transactions, the relationship between public and private markets is evolving. Although both markets respond to macroeconomic forces, a decline in the interconnectedness between the two can create a valuation divergence. Given the recent increase in the concentration of global stock markets, investors desire for diversification through private markets may be elevated.

Further, the report raises concerns around return and volatility assumption, in particular, the limitations of internal rate of return (IRR) as a performance measure. Instead, time-weighted returns (TWR) can be a more reliable measure for asset allocation decisions. Volatility estimates must also be adjusted to reflect the true risk profile of private assets, as artificially smooth return patterns can lead to overstated diversification benefits.

Despite uncertainty, private markets remain a vital component of institutional portfolios. The report stresses the importance of strong governance and clear allocation frameworks to ensure investors can navigate the changing landscape effectively. Consistent investment strategies, GP-led secondaries, and semi-liquid structures are reshaping opportunities, while slower fundraising and high valuations may improve investor terms. Active oversight and disciplined decision-making will be key to long-term success.

Ian Lyu, Director, Client Consulting at bfinance Australia, said: “Institutional investors face increasing challenges in integrating private market investments into their strategic asset allocation. With private equity now representing around 10% of total public equity market capitalisation—up from less than 5% in 2010—understanding return expectations and the illiquidity premium is crucial.

Private market benchmarks fail to capture the true volatility and risk-adjusted returns of private markets, leading to potential misallocations. For Australian investors, this research is particularly relevant as institutional and wholesale investors continue to expand their exposure to private equity, private credit, and infrastructure. With a shifting fundraising environment and evolving exit strategies, investors should look to re-evaluate their assumptions about risk and return.

By applying a structured ‘public-plus-premium’ approach, investors can develop more robust private market allocations that appropriately balance illiquidity risks with long-term return potential.”

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