In the 1980s and 1990s, institutional investors largely adhered to a straightforward formula: allocate 60% to public equities and 40% to bonds. Popularized by Harry Markowitz’s Modern Portfolio Theory, this investment approach aimed to balance capital appreciation with downside protection. Equities fueled growth and bonds offered stability, creating a diversified, efficient portfolio that reduced volatility.
However, the landscape for institutional capital during this time looked vastly different. Private companies attracted only a small share of investment, and banks or public credit markets handled the bulk of lending. Today, these dynamics have fundamentally changed. In the US, more than twice as many companies are backed by private investors than are publicly listed, signaling a profound shift in where businesses turn for funding. Private credit, once a marginal source of financing, has rapidly grown to become the financing avenue of choice for many companies.
As the investment landscape has evolved, institutional allocators have followed suit, reassessing traditional models and reshaping portfolios to reflect the expanding private opportunity set. Allocators globally have looked to transition their portfolios beyond a 60/40 portfolio split, dedicating 10% to 30% — and in some cases even more — of their portfolios to private market strategies.
The private markets’ track record of delivering superior returns is an obvious draw. Over the past five and ten years, private equity has beaten the Russell 2000 and S&P 600 — two indices that track companies of similar size to most PE-backed businesses — by roughly six percentage points annually across both time horizons.
More broadly, the structural advantages of private markets are widening the range of opportunities across asset classes. For one, the appeal of private ownership and lending has become increasingly evident to founders and management teams. In private markets, executives and investors typically share a common investment horizon, fostering strategic alignment that’s often missing in public companies.
Further, without the constant pressure to hit quarterly earnings targets, management can focus on long-term, value-building initiatives rather than short-term shareholder appeasement. Beyond capital, private equity firms offer hands-on support, providing strategic guidance, operational expertise, and access to networks and resources that help companies scale.
Private credit has seen a parallel rise, as companies and sponsors increasingly turn to private loans over traditional syndicated lending in favor of lower execution risk, more pricing certainty, and greater structural flexibility. Similar shifts are playing out across asset classes. In infrastructure, for instance, mounting government deficits have left public coffers unable to fund essential large-scale projects. As public financing falls short, private capital is increasingly stepping in, reshaping the landscape of global infrastructure development.
It’s therefore unsurprising that the investable universe within private markets is growing at a pace institutional investors can’t ignore. PitchBook projects private capital assets under management will approach $20 trillion by 2028, capturing a larger share of global financing and value creation. As a result, substituting portions of public equity and credit with private counterparts proves essential to preserving diversification.
For example, as companies opt to fund their growth cycles in the private markets, yesterday’s growth stocks have become today’s core private market holdings, reshaping the composition of public markets in the process. The US now has roughly 4,300 public companies, down from 7,300 30 years ago. The London Stock Exchange has experienced a comparable decline, more than halving between 1996 and 2022. Companies today realize the most significant growth while still in private markets, a shift from the internet era when value was often realized after an IPO.
Apollo Research shows that the median age of companies going public has steadily increased, from five years in 1999 to eight in 2022, and 14 years in 2024. In contrast, the number of private US companies backed by private equity firms has grown to around 11,200 from about 1,900 over the past two decades. Revenue benchmarks for IPOs have followed a comparable trajectory. Before 2018, the median revenue at IPO was $90 million. Today, that figure has more than doubled, rising to $189 million.
As companies extend their lifecycles with private capital, left behind is an increasingly concentrated public equity market. At the time of this writing, the top 10 companies in the S&P 500 account for 40% of the index’s total market capitalization and a record share of its earnings. The long-standing negative correlation between stocks and bonds in a traditional 60/40 portfolio perhaps once served as a buffer against equity market concentration.
However, in recent years, that relationship has unraveled, undermining the idea that bonds reliably hedge risk assets. This decoupling was evident during the 2022 bear market, when stocks and bonds declined in tandem, exhibiting a positive correlation exceeding 50%. Today, three-year rolling correlations between stocks and bonds sit at multi-decade highs.
The weeks following “Liberation Day” in April 2025 offered another acute example of this fragility. Rather than cushioning equity losses, bonds amplified them. As stocks sold off, treasury yields spiked and bond prices fell. Though the turbulence eased following the suspension of “reciprocal” tariffs, the episode underscores that a negative correlation between stocks and bonds is not a fixed feature of financial markets, but rather an increasingly unpredictable dynamic that investors can’t rely on for diversification. A macro backdrop casted in sticky inflation, which drives greater correlation between stocks and bonds — makes the need for investors to access greater diversification greater than ever.
Amid these dynamics, private markets surface as a critical avenue in portfolio construction to enhance returns and diversification. Therefore, for allocators, the fundamental consideration becomes how much of their portfolio should be allocated to private markets and how that allocation should be distributed across strategies.
However, no two institutional investors are alike and arriving at this conclusion requires a clear view of long-term return objectives. Insurance companies and pension funds, for instance, must maintain accessible and predictable liquidity to meet policyholder claims or retiree obligations. Sovereign wealth funds and endowments, by contrast, often have a longer investment horizon and can afford to lock up capital for extended periods.
The following chart highlights this dynamic by comparing the top 10 university endowments against the top public pension plans. Universities show a notably higher concentration in private equity, reflecting the distinct objectives, liabilities, and risk tolerances of the two allocator types.
Alongside return and liquidity considerations comes the question of how to distribute capital across the private universe, as different asset classes offer distinct characteristics around capital appreciation, income, downside protection, inflation hedging, and more. A look at some of the defining characteristics across asset classes illustrate these differences.
Private credit has traditionally outperformed public credit, delivering higher yields with historically lower default rates, offering downside protection. Floating-rate loans also shield investors from interest rate risk.
Infrastructure has grown in appeal for its reliable cash flows, supported by long-term contracts that often include inflation protection. The essential nature of the services behind these assets provides downside protection, while the sector offers exposure to structural trends reshaping the economy, from the energy transition to the AI buildout. Further, as the asset class matures, it now encompasses a range of strategies delivering different mixes of income and capital appreciation.
Private equity allows investors to participate in an increasing share of companies’ growth curves occurring in private markets, across a spectrum of maturity from early-stage ventures to established, profitable enterprises. In light of the AI-driven transformation, capturing growth within private-equity-backed companies has become increasingly important.
However, allocating to private investments is not without complexity. Wide performance dispersion requires top-quartile manager selection for generating strong returns. Building a private market portfolio also involves unique considerations around exposure management, commitment pacing, and cash flow forecasting. Therefore, as institutional, private wealth, and retail investors increasingly turn to private markets for diversification and structural benefits, data and technology are becoming ever more important in helping allocators optimize their strategies.
In our Pension Report, we examine how pension funds have moved away from the traditional 60/40 portfolio over the past two decades, exploring the influence of funding ratios on asset allocation, the impact of recent liquidity conditions on distribution profiles, and the emergence of Total Portfolio Approach models among some plans.
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