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Private markets in portfolios

Using real estate and private markets to help strengthen client portfolios

2 minute primer

Matt Ciambriello, Director on our Global Wealth Alternatives team, provides a quick overview of private market investments and the potential benefits they can bring to clients’ portfolios.

Highlights

Portfolios that incorporate alternative investments—including real estate and private markets—can meaningfully enhance a traditional 60-40 asset allocation model.
There are several types of real estate and private market offerings, each with unique use cases and risk/return profiles.
Advisors need to consider client goals and liquidity needs when exploring the addition of real estate and private assets to portfolios.

Investment portfolios for individual investors have traditionally focused on public equities and fixed income, often structured into a 60-40 asset allocation split to balance risk and reward potential. Increasingly, however, real estate and private markets offerings are viewed as viable additions to portfolios for high-net-worth clients.

Historically, these asset classes have been characterized as primarily suitable for institutional investors, but recent efforts to democratize access to them have spurred growing interest from accredited individuals and wealthy families. Not only do private markets offer access to compelling market or economic trends, recent studies suggest that they can also enhance diversification—and therefore risk management—because of low correlations with public equity performance.

Real estate and private markets

There are several categories of real estate and private market strategies (sometimes grouped under the heading alternative investments). Each category has unique qualities, but as a group, alternative investments can potentially deliver enhanced results, relative to unit of risk, compared with their public market counterparts.

The most common private markets strategies in use today include:

Real estate: This diverse sector includes physical properties or real estate-related securities distributed across all four quadrants of investing—public equity and debt as well as private equity and debt. It is popular in wealth portfolios as it has historically provided consistent income at moderate risk.

SUB-STRATEGIES

Residential
Commercial
REITs
Real estate debt

RISK-RETURN PROFILE

Moderate risk, income generation

Market size

$1.8T

Private credit: Also known as private debt, private credit involves lending to companies outside traditional banking channels, often with the expectation of an enhanced yield.

SUB-STRATEGIES

Direct lending
Investment-grade private credit
Distressed debt

RISK-RETURN PROFILE

Higher yields than comparable public debt instruments, with a wide range of risk

Market size

$1.6T

Infrastructure: Infrastructure strategies finance essential public goods such as transportation, utilities, and digital infrastructure (e.g., data centers) through equity or debt structures. These assets typically provide long-term, stable cash flows.

SUB-STRATEGIES

Equity and debt across:

Energy
Power
Digital
Transportation
Social infrastructure

RISK-RETURN PROFILE

Moderate risk, stable cash flows

Market size

$1.6T

Private equity: Private equity provides capital to private businesses with the aim of improving operations and, possibly, exiting via a sale or public offering.

SUB-STRATEGIES

Buyouts
Growth capital
Venture capital

RISK-RETURN PROFILE

High risk, high potential return

Market size

$11.5T

Hedge funds: As pooled investment funds, hedge funds use various strategies, such as long/short equity, arbitrage, and macroeconomic bets, with the goal of generating returns uncorrelated to traditional markets. Hedge funds often use derivatives strategies to enhance performance, which may have the additional risk of synthetic leverage.

SUB-STRATEGIES

Long/short
Event-driven
Macro

RISK-RETURN PROFILE

Varies widely, active management

Market size

$4.7T

Advantages compared to a traditional 60-40 portfolio

Private markets strategies have grown significantly, in part because they offer advantages to private wealth clients and others that have traditionally relied on a standard 60-40 portfolio. The 60-40 asset allocation model provides clients with access to sources of return in both public equity and fixed income markets, while managing risk via diversification. Yet private market and real estate investments have also historically offered a growing range of dynamic investment opportunities with attractive returns relative to risk levels taken.

Private markets often provide early access to innovations and disruptive technologies, such as artificial intelligence (AI) or alternative energy. In addition, private markets are typically less efficient than public markets, presenting mispricing opportunities that can add significant value.

Private markets are playing an increasingly critical role in portfolio risk management as well. One perceived benefit of the traditional 60-40 portfolio has been the defense it can provide against volatility because of the historically low correlations between equities and fixed income investments. In recent years, however, this diversification benefit has not been consistently reliable.

A 2023 analysis published by the CFA Institute¹, for example, highlighted that the diversification benefits of the 60-40 portfolio have been greatly reduced in inflationary or stagflationary environments. It noted that inflationary trends led to major losses for both stocks and bonds in 2022, wiping out the diversification benefit of the 60-40 portfolio.

Comparison of risk and return for private market investments vs. public and traditional investments (2013-2024)

Compare annualized return and risk for private market investments vs. public and traditional investments between 2013-2024.

Private markets strategies are idiosyncratic in that performance is driven more by the unique circumstances of the investment than by larger market or economic trends. As a result, correlations are typically lower than those between public markets, providing more opportunities for effective diversification. In addition, real assets such as real estate can benefit from inflationary trends due to income streams that are linked to inflation.

Due to this combination of traits, real estate and private markets exposures have historically added meaningful value to a standard wealth portfolio. As indicated in the chart below, over the 10 years through 30 September 2024, most real estate and private market options have produced results relative to their risk level that far exceed the traditional 60-40 portfolio alone. Even modest allocations to these diversifying sectors have been beneficial.

Source: Preqin, Bloomberg, Principal Asset Management, 30 September 2024. Please see indices used in the disclosures at the end of the document. Indices are unmanaged and do not take into account fees, expenses, and transaction costs and it is not possible to invest in an index.

Key benefits of real estate and private markets

Access to a wider range of dynamic investment options
Mispricing opportunities
Potentially enhanced returns relative to level of risk
Historically, lower correlations with core public markets

Introducing private markets and real estate to clients

Real estate and private market strategies can help clients achieve their financial ambitions, but they do not function quite the same as public market strategies. If you would like to introduce these asset classes to your clients, it is important to discuss potential impacts with them and to set clear expectations.

At a high level, you will need to clarify the goals of any real estate or private markets exposure, including desired income and capital appreciation results alongside risk mitigation. More specifically, your client’s liquidity needs will be critical in determining both the type of private markets exposure they can consider and the percentage of their assets that can be allocated to them.

Private market strategies may have lock-up periods, redemption policies, or other terms that need to be aligned with a client’s liquidity needs. This is particularly important for clients that are used to the instant liquidity available from public asset classes. For these clients, a documented liquidity plan can be a useful tool for selecting the right exposures.

Three questions to ask your clients about alternative investments:

Have you ever thought about expanding your investment portfolio into private markets?
Are you limiting your investment opportunities for liquidity you don’t need?
Do you have any key areas of concern when it comes to investing in private markets?

Finally, real estate and private market exposures can help you offer your clients tax efficient opportunities. Using them in a client portfolio may not dramatically increase or decrease tax liability. However, private sectors are subject to different taxation laws than public securities, which could benefit some clients’ portfolio outcomes net of tax.

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If you have questions on how real estate and private markets allocations can fit into your clients’ investment approach, ask an expert on our team.

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Taking action

Once you and your client develop a consensus, involve your asset manager partner. A good partner has a deep understanding of the private markets they invest in and can articulate how to achieve income growth, inflation hedging, or any other client priorities using these types of investments. They will also have a clear view of the risks and liquidity constraints involved.

Alternative investments offer compelling opportunities to enhance traditional portfolios, providing diversification, income stability, and inflation resilience. As investors seek to navigate evolving market conditions, strategically integrating private markets and real estate can potentially lead to attractive long-term outcomes.

¹ Source: CFA Institute, The 60/40 Portfolio Needs an Alts Infusion, December 2023.

Disclosure

For Public Distribution in the United States. For Institutional, Professional, Qualified, and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk considerations

Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. Real estate investment options are subject to risks associated with credit, liquidity, interest rate fluctuation, adverse general and local economic conditions, and decreases in real estate values and occupancy rates. There are risks associated with private equity that are not applicable to typical investments in the public equity market, are generally illiquid and carry the potential for significant losses. Typically, private credit investments are in restricted securities that are not traded in public markets, can range in credit quality and are subject to substantial holding periods. Infrastructure investments are long-dated, illiquid investments that are subject to operational and regulatory risks. Hedge funds may not be suitable for all investors and often engage in speculative investment practices which increase investment risk; are highly illiquid; are not required to provide periodic prices or valuation and often employ complex tax structures. Investment risk may be magnified with alternative investment strategies due to their use of arbitrage, leverage, and derivatives. Asset allocation and diversification do not ensure a profit or protect against a loss. The risk management techniques discussed seek to mitigate or reduce risk but cannot remove it.

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Bloomberg All Hedge Fund Index - represents the average performance of hedge funds, as defined by the Bloomberg Hedge Fund Classifications; Fixed income: Bloomberg US Agg Index - is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market; Private Equity excl. VC: Preqin Private Equity excl. VC Index - is used to measure the returns of private equity investments, excluding the specific risk and return characteristics associated with venture capital; Venture capital: Preqin Venture Capital Index - is a benchmark that tracks the performance of venture capital funds globally; Private Debt: Preqin Private Debt Index - is a time-weighted return index that tracks the performance of private debt funds globally; Real Estate: Preqin Real Estate Index - is a benchmark that tracks the performance of private real estate investments; Infrastructure: Preqin Infrastructure Index - is a benchmark that tracks the performance of private infrastructure investments, specifically the returns on invested capital for funds tracked by Preqin; U.S. equities: S&P 500 Total Return Index - Widely regarded as the benchmark gauge of the U.S. equities market, this index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large cap segment of the market, with over 80% coverage of U.S. equities, it also serves as a proxy for the total market.; Global equities: MSCI World Total Return Index - is a global stock market index that tracks the performance of large and mid-cap companies across 23 developed countries.

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The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

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"These Terms & Conditions explain certain legal and regulatory conditions and restrictions in relation to the Principal Global Investors (Europe) Limited website, and in relation to the Principal Global Investors Funds (‘the Funds’). This information may be changed by Principal Global Investors at any time without notice.

In these terms and conditions, references to 'Principal Global Investors' means Principal Global Investors (Europe) Limited or any affiliate of the Principal Financial Group, Inc. or Principal Global Investors, LLC.

Before you proceed, you must acknowledge that you have read, and agree to, our terms and conditions.

Information in relation to the Principal Global Investors Funds is available through this web site to institutional investors resident in the following countries of: Belgium, France, Finland, Germany, Guernsey, Ireland, Italy, Jersey, Netherlands, Spain, Sweden, Switzerland and the United Kingdom. By proceeding this far you are representing and warranting that you are an institutional investor resident in one of these countries. Not all of the Funds are available in all these jurisdictions, and investors are directed to the Country Registration document for detailed information. What follows is not an offer or invitation to acquire an investment to, and should therefore not be relied upon by, any person anywhere other than the countries noted. Persons in respect of whom such prohibitions apply must not access this web site. This web site is reserved exclusively for non-U.S. persons and should not be accessed by any person in the United States.

Yes, I certify to be an institutional investor and resident of a country listed above.

Cookies
Use of cookies on this site is outlined in the Privacy and Security Policy. In accepting these terms and conditions, you accept the terms of the Cookie Policy and the use of cookies from this site.

Legal Entity Disclosure and Regulation
In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

If you accept these terms and conditions, click “Accept.”

You are about to leave PrincipalAM.com and be directed to our Japanese site, PrincipalGlobal.jp. If you wish to proceed, please click "Accept." If you would like to stay on PrincipalAM.com, please click "I do not accept."

You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

Click ""Accept"" to indicate your acknowledgement and acceptance of Principal Global Investors Terms of Use and to continue."

This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.