Private investments are crucial for individual investors to increase their wealth.

Private investments have surged from $4 trillion to $14 trillion in the past decade, driven mainly by institutional capital seeking higher returns and alpha generation. It is understandable that investors are drawn to alternative investments, which have consistently outperformed global public markets over the past 10, 15, and 20 years.

The investor base is expanding to individuals, with Bain estimating that assets under management in alternatives from individuals have increased to approximately $4 trillion and projecting potential growth to $12 trillion in the next decade. However, adding alternatives to portfolios requires careful consideration, and most individuals are likely to seek the guidance of experienced advisors in the process.

To succeed in alternatives investing, individuals should prioritize three key themes: long-term time horizons, investing in manageable amounts, and diversification. This advice applies to all wealth categories as new open-end funds increase accessibility for high-net-worth investors.

For over 20 years, I have been collaborating with affluent clients seeking to increase and safeguard their capital through alternative investments. Our approach involves utilizing private market opportunities to construct a well-diversified portfolio that aligns with each client's risk profile. While the most pressing prospects currently lie with high-net-worth investors, these opportunities continue to expand as a result of recent product advancements.

As the number of private companies increases, a portfolio limited to public companies will miss out on market opportunities. Since 1996, the number of US public companies has decreased by 43%, while the number of US private equity (PE) backed companies has increased five-fold since 2000. Only about 15% of companies with revenues over $100 million are public.

By investing solely in public markets, individual investors have limited exposure to expanding businesses in the broader economy. We anticipate that this trend of companies remaining private will persist, as it offers greater control, flexibility, reduced regulatory reporting obligations, and improved access to capital.

Understanding the differences between private and public markets is crucial when considering their respective advantages, such as broader economic exposure, diversification, and alpha generation.

Careful selection of investment vehicles and precise allocation sizing are necessary for private markets, which require longer-term capital commitments and are less efficient than public markets. We emphasize the importance of committing to managers who maintain consistent strategies and methodologies and have a proven track record of outperforming public markets over time.

We advise clients to diversify their investments across multiple asset classes, managers, and funds. For many years, we have constructed portfolios for ultra-high net worth clients who can tolerate illiquidity, typically with 20-30% of their holdings in alternatives. High-net-worth investors may consider a target of 10-15% for alternatives.

To optimize diversification, we recommend clients in traditional closed-end funds to consistently allocate funds across various strategies over time, with similar sizes each year.

Open-end investment vehicles have made the investment process easier for investors of all wealth levels. Unlike traditional closed-end methods, these new vehicles require a full capital commitment upfront. While minimums in open-end funds can be lower than traditional closed-end strategies, high-net-worth investors can use them to diversify their investments across fund categories and managers as they expand their alternative exposure.

Open-end products may appear liquid, but individual investors must recognize that they are not truly liquid. While these vehicles allow for redemptions in favorable market conditions, such as when the funds are performing well and attracting more investments, full liquidity may not be available if a large number of investors wish to withdraw their investments simultaneously.

It is advisable for individuals to only commit to open-end funds in amounts they can afford to have tied up and to treat these funds as if they were conventional alternative investments, which are largely illiquid.

While many newer open-end funds lack significant performance track records due to not having completed full cycles, their managers may have extensive experience in other structures and strategies. To evaluate their potential, investors should assess their resources, such as team strength and competitive advantages.

In private credit, sourcing and selecting top-quality credit may be key. In other asset classes, such as private equity, top managers may excel at driving organic growth, resolving issues, and enhancing operational efficiencies.

To make it easier for individuals to evaluate various investment options, we recommend working with financial advisors who have access to wealth platforms with proven alternative managers. These advisors can help investors diversify their portfolios by monitoring multiple managers.

As companies stay private for longer, investors seek alpha generation, and the emphasis on portfolio diversification grows, opportunities and access to alternative investments should only continue to expand for individual investors.