Investing in Private Markets: A Prudent Approach

Investing in Private Markets: A Prudent Approach

By: Anthony Criscuolo, CFP®

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For decades, investing meant buying publicly traded stocks and bonds. Sometimes directly, often through mutual funds and exchange traded funds (ETFs). That was where the vast majority of investable companies lived, and for most investors, it was enough. The world has changed.

Today, a growing share of economic activity happens outside the public markets. Many of the most valuable, innovative, and profitable companies now stay private far longer than they did in the past. As a result, private markets are no longer a niche corner of investing reserved only for large institutions – they are a meaningful part of the global investment universe.

The question is not whether private investments are “better” than public ones. They aren’t.

The more relevant question is whether private markets can play a thoughtful, complementary role in a well-constructed long-term portfolio. When approached prudently, and when carefully integrated as part of your broader planning, the answer is often yes.

This is especially true for investors who may have amassed ample cash on the sidelines, wary of adding more exposure to the same public stocks and bonds they already own. Or investors who may want to liquidate old real estate investments or other assets, but again, don’t know where to reinvest the proceeds.

Diversified private market investments can be a great complement to your portfolio in many situations, so let’s dive a little deeper into private markets and how to prudently integrate them into your investment strategy.

Why Private Markets Matter More Today Than They Used To

Twenty or thirty years ago, companies tended to go public relatively early in their life cycles. Today, the opposite is true. In fact, there are far fewer public companies than there were in the late 1990s, even as the economy has grown substantially. Meanwhile, the number of private companies, particularly those backed by institutional private equity sponsors, has exploded. Just look at the two charts below.

Many well-known businesses now remain private for a decade or more, choosing to access capital through private markets rather than public stock exchanges. That means a larger portion of corporate growth, job creation, and innovation is occurring outside the public markets. Thus, for investors to have any exposure to these companies in their portfolio they need some allocation to private markets. Adding private equity exposure is more about expanding the opportunity set and adding diversification within your portfolio – it’s not about making risky one-off investments in a private deal you heard about at a cocktail party.

If your portfolio only invests in publicly traded securities, you can still be broadly diversified – but you are not nearly exposed to the entire opportunity set the way you once were. This does not mean public markets are bad or inadequate. Public stocks and bonds remain the core building blocks of long-term, well-constructed portfolios. They provide ample liquidity, high transparency, low fees to access and trade, and significant regulatory oversight with strong accounting standards and financial reporting requirements. Not every investor needs private market exposure, but it is another tool in the toolbox to enhance your overall strategy, when appropriate.

How Private Equity Has Changed

Private equity itself has also evolved. Historically, access to private equity meant committing capital to a single fund, with long lockups, unpredictable capital calls, limited transparency, complex tax reporting, and concentrated risk. Returns depended heavily on picking the “right” manager and the “right” vintage year. The dispersion of outcomes was wide, and the risk of permanent capital loss was very real.

Today, access looks very different. The private equity market has matured, and investment structures have improved. Investors can now access diversified, institutional-quality portfolios of private companies through evergreen vehicles that invest across:

• Hundreds of underlying private businesses
• Multiple private equity managers and strategies
• Different industries, geographies, and vintage years
• Simplified tax reporting via Form 1099 (not the more complex Schedule K-1)

This evolution matters. A one-off private deal has the real risk of going to zero. A single private equity fund with one manager, executing one strategy, in one vintage year, can also have material risk. However, a substantially diversified private portfolio of multiple managers and strategies dramatically reduces that risk while still offering long-term return potential and diversification benefits.

This is a critical distinction. In private markets, diversification is not optional, it is essential. Large institutional investors can build out this diversification by investing in hundreds of underlying private funds – individual investors cannot. This is why the evolution of the private market into more diversified funds is so important. Individual investors now have the ability to prudently access private markets – this ability did not reasonably exist several years ago.

Private Investments Are Not “Better” – They Are Just Different

It is tempting to frame private investments as superior. Higher headline returns, exclusivity, and institutional prestige all feed that narrative. We like to avoid framing private markets as something “special” or “better.” Private investments are not inherently better than public ones. They have different risk factors which should be carefully considered, including:

• Less liquidity (you cannot easily sell)
• Less transparent and more complex
• Exposure to leverage risk (private companies tend to have more debt)
• More dependent on manager skill or operational expertise

In exchange for those tradeoffs, investors may receive two principal benefits:

1. Enhanced Diversification – Private assets often behave differently than public stocks and bonds, particularly over shorter periods.
2. Illiquidity Premium – Investors should be compensated for tying up capital and accepting limited liquidity.

That’s it – no magic, no guaranteed outperformance. At the end of the day if you own an equity stake in a business you own a stake in its future cash flow and profits. Whether that company is publicly traded on the New York Stock Exchange or privately held among a smaller group of investors, it’s the same underlying economic and investment principles that matter.

We believe private markets should be viewed as a complement, not a replacement, for traditional investments. They expand the opportunity set and can improve portfolio construction when sized appropriately and implemented carefully.

The Role of Private Credit

We will not dive too deep into the world of private credit, but private markets are not just about equity ownership. Private credit, which is just a private bond, has grown significantly over the past 15 years as well. After the Global Financial Crisis in 2008-2009, banks pulled back from middle-market lending due to tighter regulations and capital requirements. That created space for private lenders, backed with capital from investors to step in.

Today, many private companies borrow directly from private credit funds rather than traditional banks. For investors, this creates direct access to:

• Floating-rate loans of private companies
• Senior secured position in a business’s capital structure
• Yields that have historically exceeded comparable public high yield bonds

Private credit can serve as a diversifying income component within a broader portfolio. But again, the same principles apply –diversification, credit quality, and structure matter far more than chasing yield or finding a one-off “hot” investment from a friend. A bond is nothing more than a promise to pay your money back plus an interest rate. Some bonds are sold in public markets, and some are privately sold. Again, this is about expanding the opportunity set and adding diversification, not seeking highly risky or concentrated debt investments.

A one-off loan to your brother-in-law to start a new energy drink company is probably a bad investment. However, a diversified private credit fund with exposure to hundreds of underlying loans to private companies, backed by institutional private equity owners, in various stages of growth and operating across broad market segments, can be a good complement to your overall portfolio. Access to the private credit market has evolved in a comparable manner to the access to the private equity market, as described earlier.

Illiquidity – It’s A Feature, Not a Defect

The most obvious drawback of private investments is limited liquidity. You cannot sell a private loan or a private business tomorrow because markets feel uneasy or you just want cash to buy something else. This lack of liquidity is intentional. In well-designed private market structures, limited liquidity protects long-term investors from being forced sellers during periods of market stress. Assets are held through cycles, not marked-to-market every day, and not liquidated to meet short-term redemptions.

This makes complete sense. You would not want to sell your home during a real estate crash. If you could, you would hold it and wait for a recovery or a better time to put it on the market. The same is true for a private business – selling into market stress is rarely a good time to be selling. You want to make sure your private investment funds have the ability to avoid being forced sellers during stress, and thus having limited liquidity is a feature, not a defect.

This illiquidity is not free. Investors should be compensated for it – this is the “Illiquidity Premium” mentioned before. But liquidity must be planned for and considered in the context of your overall asset allocation and portfolio construction decisions. After all, you may need access to your assets even during market declines, this is why planning for liquidity and proper sizing of certain investments, as well as asset location, are so important.

Private investments should typically represent a relatively small portion of your portfolio – one that does not compromise your ability to fund spending needs, manage taxes, or rebalance during market volatility. Large institutional investors or pension funds don’t have these same issues, so they often have larger allocations to private investments – don’t let that tempt you into over-allocating. You are not the Yale Endowment Fund! Individual investors should generally target a smaller allocation to private investments, which of course will vary based on portfolio size, risk tolerance, and expected liquidity needs.

The biggest mistake investors make with private markets is not choosing the “wrong” fund – it is allocating too much, too quickly, without regard for liquidity or overall portfolio balance. The other big mistake is focusing on one-off, highly concentrated private deals, trying to chase hot, quick returns. Private investments are not a get-rich-quick scheme.

Private market investments work best when they are:

• Part of a highly diversified portfolio, anchored by public stocks and bonds
• Sized conservatively, integrated with personalized liquidity planning
• Funded with long-term capital
• Integrated as part of your broader financial and tax planning strategies

Private investments are not tactical trades – they are long-term planning decisions. Allocations can evolve over time as portfolios grow and liquidity needs change. This flexibility is another advantage of modern evergreen private investment structures, which allow exposure to be adjusted without waiting years for new capital calls or new funds to come to market.

Final Thoughts

Private markets are larger, more accessible, and more relevant than they were in the past. Ignoring them entirely may leave your portfolio less diversified than intended but embracing them recklessly is equally problematic.

Private investments are not about finding something “better.” They are about acknowledging that the investment universe has changed – and responding thoughtfully. As with everything in long-term investing, success comes from discipline, diversification, and structure – not from chasing returns or narratives.

Good investment strategy is not about predicting the future or looking to find the next hot private company pre-IPO. It is about building a portfolio that can endure uncertainty, manage risk, and support your long-term goals across many market cycles. Private markets, when used prudently, can be part of that strategy.

Anthony Criscuolo, Senior Wealth Manager

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Bluerock Wealth Management is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment advisor does not imply a certain level of skill or training. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Bluerock Wealth Management and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Bluerock Wealth Management and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Bluerock Wealth Management and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Bluerock Wealth Management and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.

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Bluerock Wealth Management is registered with HighTower Advisors, LLC, an SEC registered investment adviser and/or Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through HighTower Advisors, LLC. Securities are offered through HighTower Securities, LLC.

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