In last weekend's Research Pitch, we discussed the performance impact of going beyond traditional 60/40 portfolios by including allocations to different private market strategies.

This analysis was powered by historical simulations that modeled randomly selecting closed-end private funds from each vintage year. Our main conclusion was that adding private markets to portfolios has not been a surefire way to improve performance—strategy, timing, and benchmark selection matter.

While running the simulations with random fund selection offered insights about performance differences between public and private assets, it only captured one piece of the puzzle. LPs are not randomly selecting funds nor is there a passive index-like option available in private markets. Manager selection is the other key piece of the private market performance puzzle LPs are looking to solve.

Allocators often point to the wide dispersion of IRRs across individual private market funds, particularly when compared to active public funds, as evidence of the importance of manager selection in private market investing. While this data is compelling at face value, it fails to fully capture the potential benefits of manager selection skill due to the limitations of IRRs and the fact that long-term portfolio outcomes depend on many manager decisions over time.

To get a clearer picture of alpha opportunities in private markets, we once again leveraged our historical simulation framework. Each simulation models the performance from 2000 to 2024 of a 60/40 portfolio with a 20% allocation to one of four private market strategies: PE buyout, VC, private debt, and real estate.

This time, however, we introduced three hypothetical scenarios of manager selection skill when adding private funds to the portfolio: "moderate skill," "high skill," and "underperformer avoidance." Instead of random selection, the probability of selecting each fund was weighted by its final quartile performance ranking and the skill scenario.

 

Simulated portfolios with manager selection skill were then compared to otherwise identical portfolios with random selection. Total portfolio performance differences between the two isolated the value add of skilled manager selection over time.

 

How much alpha is there in private markets in terms of total portfolio returns? The answer will of course depend on the size of the allocation, but for a standard allocation of 20%, our analysis indicates it is somewhere between 20 and 60 basis points per year.

Read more about the methodology and view the full results in Allocator Solutions: How Much Alpha Is There in Private Markets?

PitchBook’s latest private market performance benchmarks are out, and divergence in return profiles remains evident across 1-year horizon IRRs.

At the top end, real assets and PE strategies led the way, while real estate stayed in the red. Commercial real estate continues to be an ongoing struggle, but VC looks to be shaking off its hangover from the 2021 boom as the IPO window has started to reopen. Real assets funds have found support from infrastructure tied to growing digital infrastructure demand and oil & gas benefiting from rising power consumption needs.