Learn how much private equity is appropriate for a portfolio. Explore allocation ranges, risks, liquidity trade-offs, and whether 20% may be too much.
The global markets are evolving. How are you thinking about private equity allocations?
Private equity can offer exposure to companies and opportunities that are not available in the public markets. Let’s explore the role private equity can play in your portfolio and whether it aligns with your goals.
- Private markets make up a growing part of the global investment landscape.
- Vanguard’s research suggests that private equity funds, managed by top-tier investment teams at a reasonable cost, can enhance investor outcomes. The optimal allocation depends on your circumstances, risk tolerance, and individual goals.
- Liquidity needs, investment horizon, manager selection, and tax considerations are important factors when evaluating the asset class.
- Vanguard’s research evaluates private equity allocations as a share of total equity exposure rather than a percentage of an investor's overall portfolio.
- Working with a financial professional can help determine whether private equity fits within a broader financial plan and how much exposure may be appropriate.
What about private markets has changed?
Private equity is a growing segment of the global equity markets and represents some of the fastest and most innovative companies in the world today. In fact, there’s a chance you work for a privately held company that otherwise isn’t investable for the average person.
As the private markets have expanded, investors now have access to a wider variety of investment options within the asset class. This makes it increasingly important to evaluate which structures, if any, best align with each investor’s goals, portfolio and liquidity needs, and risk tolerance.
How should I begin evaluating the asset class?
Private equity can be a valuable part of a portfolio for the right investor, offering the potential for higher long-term returns and exposure to opportunities beyond public markets. As interest in private markets continues to grow, more investors are exploring how private equity can complement their overall wealth strategy.
For many ultra-high-net-worth investors, private equity introduces considerations including longer investment horizons, varying liquidity profiles, less frequent valuations, and specialized tax reporting. Partnering with a financial professional can help you evaluate how private equity could fit into your portfolio and investment goals.
Contact your advisor to explore whether private equity is right for you
What are some key considerations to evaluate?
Evaluating private equity opportunities may require additional due diligence compared with traditional public market investments. Understanding these considerations can help determine the appropriate role private equity can play in building a diversified portfolio to achieve your investment and legacy goals.
Cash flow timing
- Initial investment is committed up front but invested over years. Rather than investing all at once, capital is typically requested from investors as opportunities are identified over several years.
- Liquidity is limited throughout the investment life cycle. Returns are generally realized through distributions when portfolio companies are sold, merge with another company, or become publicly traded. Because access to invested capital may be restricted for an extended period, you should ensure you have sufficient liquidity elsewhere in your portfolio to meet spending needs.
Costs and manager selection
- Private equity investments often have higher costs than public investments, so it’s important to evaluate costs and expected returns.
- Similar to public markets, not all managers and strategies are created equal; therefore, you should be able to perform due diligence on the firm or partner with a provider who has the appropriate expertise.
Taxes
- Depending on the investment structure, investors may receive tax documents that differ from traditional 1099 forms and may require working with a tax professional.
Interested in learning more about private equity at Vanguard?
What allocation might be best for me, and why?
There’s no one-size-fits-all approach. Private equity allocations are individualized based on factors like your risk tolerance, cash flow needs, investment goals, and desired allocations. Vanguard’s framework and methodology suggest a private equity allocation from 0% to 40% of one’s total equity allocation, not their overall portfolio allocation.
The chart below shows hypothetical private equity allocations and the considerations that might lead an investor to decide on a particular level of exposure:
0% allocation: Not a fit because they have higher liquidity needs, shorter time horizons, or discomfort with uneven outcomes.
5%-10% allocation: An exploratory approach because they are cautious about liquidity or want exposure to potential upside without reliance on results.
10%-25% allocation: Deliberate allocation because they have long time horizons or acceptance of irregular cash flows.
25% or more allocation: A significant allocation because they are comfortable having money tied up, strong manager access, and portfolios built to absorb outcomes that can vary widely.
Which allocation best represents your situation?
An advisor can help determine whether to invest and how much to allocate to ensure alignment with your goals, time horizon, liquidity needs, and portfolio risk to improve outcomes. Schedule time today.