Optimising private market asset allocations

Executive summary

In this paper we examine the integration of private market assets within traditional asset allocation strategies to assess performance impacts across investor risk profiles.

We believe that including private market assets can significantly enhance portfolio returns for investors who adopt a risk-based utility-maximising strategy in portfolio construction. Additionally, we find that unlisted infrastructure has the most potential of the private market assets considered to improve Sharpe ratios, especially for ‘Defensive’ and ‘Balanced’ investors.

Our research applies a utility maximisation framework which facilitates risk appetite aware optimisation to tailor portfolios to match specific investor risk preferences and lifecycle stages.

A novel two-stage returns unsmoothing approach is used to more accurately estimate true private market return volatility. We show that even after returns unsmoothing, private markets can significantly enhance portfolio outcomes.

This study finds that defensive investors benefit from allocations to infrastructure and private credit, achieving lower volatility and higher returns. Balanced investors see similar advantages with a stable allocation to infrastructure, while growth investors lean towards private equity for higher risk-reward profiles.

This analysis adds further weight to our assertion that private market assets have a material role to play in optimising investor portfolios.