Private Markets Transition From Niche To Core Portfolio Component

The Private Markets Revolution: Why "Safe" Used to Mean Liquid, and Why That's No Longer True

This conversation with Stephanie Drescher, Apollo's Chief Client and Product Development Officer, reveals a fundamental shift in how investors perceive risk and return. The non-obvious implication is that the very definition of "safe" has been inverted: illiquid private markets, once considered inherently risky, are now offering a more diversified and potentially less volatile path to achieving long-term financial goals than increasingly concentrated public markets. This analysis is crucial for financial advisors, family office managers, and individual investors who need to navigate this evolving landscape to build resilient portfolios. Understanding this inversion provides a significant advantage in capturing alpha and achieving superior risk-adjusted returns in an era where traditional 60/40 portfolios are showing their limitations.

The Illusion of Safety: When Liquid Became Risky

The traditional wisdom held that liquidity equated to safety. Public markets, with their daily pricing and ease of access, were perceived as inherently less risky than the opaque, locked-up world of private equity and credit. Stephanie Drescher, however, argues that this notion has been fundamentally challenged, particularly in light of recent market dislocations. The concentration within public market indices, where a handful of stocks often drive the majority of performance, has exposed a lack of true diversification. This has led to a "fundamental rethink" of how investors should approach portfolio construction.

Drescher highlights that the public markets, specifically indices like the S&P 500, have become remarkably concentrated. This means that a significant portion of the perceived "safety" of public markets is, in reality, tied to a very small number of companies. When these dominant players falter, the entire index can experience significant underperformance, a stark contrast to the steady growth many investors have come to expect. This concentration, she explains, fundamentally alters the risk profile, making the historically "risky" private markets a more attractive proposition for diversification and alpha generation.

"Historically people have thought that because something was liquid in the public markets it was inherently safe or frankly safer than something less liquid in the private markets and as we look at 2022 and frankly many moments of dislocation in the public markets I think there's now a much clearer recognition that the public markets can be both safe and risky as can the private markets."

This shift means that private markets are no longer just a niche "add-on" for institutional investors but are becoming a core component of both equity and debt allocations for a broader range of clients. The appeal lies not only in the potential for higher returns but also in the ability to mitigate the volatility introduced by concentrated public market exposure. The "toolkit" for advisors now must include both public and private options within each asset class to maximize returns, enhance diversification, and reduce overall portfolio volatility.

The Shrinking Public Float and the Rise of Private Opportunity

A significant, yet often overlooked, driver of the shift towards private markets is the dramatic decrease in the number of publicly traded companies. Drescher points out that the number of public companies has roughly halved over the past few decades, while approximately 90% of all companies globally remain private. This stark reality makes it increasingly difficult to achieve truly representative portfolio exposure by focusing solely on public equities.

The consequence of this shrinking public float is that investors seeking broad market representation are effectively excluding the vast majority of the global economy. This creates an inherent limitation in public-only portfolios. Drescher emphasizes that the decision to invest in private markets is no longer solely about seeking illiquidity premiums but about accessing a much larger and, in many ways, more representative universe of investment opportunities.

This dynamic fuels the growth of private markets, not just for institutions that have been allocating to these areas for decades, but increasingly for the wealth management sector. The challenge for advisors has historically been the perceived complexity and lack of standardization in private investments compared to their public counterparts. However, Drescher highlights significant innovation in this space, including interval fund structures and ETF formats that incorporate private market assets, offering greater interim liquidity and simplifying access for advisors.

"The institutions have realized that now over decades and they've been the beneficiaries of that excess return by accepting some amount of illiquidity with the advent of new structures in the private markets certainly for wealth and increasingly even for institutions you can select offerings out there that provide more interim liquidity."

The "One Apollo" Advantage: Co-Investment and Shared Outcomes

A key differentiator for Apollo, as explained by Drescher, is their commitment to co-investing alongside their clients. The firm regularly invests its own balance sheet capital into the strategies it manages for third-party clients. This practice, where Apollo's commitment can be substantial--often in the double digits, far exceeding the typical 2-5% seen elsewhere--creates a powerful alignment of interests.

This "shared outcome" approach, as Drescher describes it, instills confidence in clients. Knowing that the asset manager has significant "skin in the game" reduces perceived risk and reinforces the idea that Apollo is truly partnered with its investors. This is not merely about fee generation; it's about a performance-first mentality where the firm's success is intrinsically linked to the success of its clients. This commitment to alignment is a critical factor in building long-term trust and delivering consistent performance, especially during periods of market dislocation.

"We often say well we can't guarantee the outcome we guarantee a shared outcome and that means a lot to us in terms of our commitment and focus but also to our clients because they they know how important it is to us in multiple ways."

The scale of Apollo's co-investment is remarkable, with the firm having deployed approximately $25 billion in just a few days during a recent moment of market dislocation. This ability to act decisively and deploy capital at scale during such times is a testament to their deep credit expertise and their conviction in mispriced assets. This disciplined approach to identifying and capitalizing on opportunities at the right price, even amidst complexity, is a core tenet of their strategy.

The Democratization of Private Markets: A Global Trend

Drescher identifies a significant global trend towards the "democratization of private markets." This involves increasing access for individual investors, facilitated by regulatory changes and technological advancements. Initiatives like executive orders around 401(k)s in the U.S., and similar regulations in Europe and the UK, are pushing for greater inclusion of private market investments in retirement plans.

The mismatch between the long time horizons of retirement savings (decades) and the daily liquidity of traditional 401(k) solutions is being addressed. Drescher suggests that a shift is underway, moving from a focus on minimizing fees to maximizing outcomes for participants. This evolution is critical because it acknowledges that private markets can provide the additional return and diversification needed to meet long-term financial goals, especially when public markets are highly concentrated.

The projected growth of private markets, with individual allocations currently lagging far behind institutional ones (average 3% versus over 20%), indicates a substantial runway for expansion. This growth is fueled by proprietary origination engines--Apollo has built 16 such engines across various sectors like aviation, consumer finance, and real assets--which create unique investment opportunities that are not available in public markets. This focus on origination, rather than just Assets Under Management (AUM), is seen as the key differentiator in delivering alpha and long-term value.

Key Action Items

• Re-evaluate "Safety": Challenge the assumption that liquidity equals safety. Analyze the concentration risk within your current public market holdings. (Immediate)
• Explore Private Market Structures: Investigate interval funds, ETFs with private market exposure, and other semi-liquid structures that offer greater access and interim liquidity. (Over the next quarter)
• Understand Co-Investment Benefits: Seek out managers who demonstrate a strong commitment to co-investing their own capital alongside clients, signaling alignment of interests. (This pays off in 12-18 months)
• Diversify Beyond Public Markets: Consider incorporating private credit and private equity into both equity and fixed income allocations to enhance diversification and potentially reduce volatility. (Ongoing strategy)
• Focus on Origination: Prioritize managers with proprietary origination capabilities, as these are more likely to uncover unique alpha-generating opportunities not available in the broader market. (This pays off in 18-24 months)
• Advocate for Retirement Plan Evolution: Support efforts to include private market options in retirement plans, recognizing the long-term nature of these savings goals. (Long-term investment)
• Embrace the "Shared Outcome": When evaluating private market investments, look for managers who guarantee a shared outcome, demonstrating a commitment to your success. (Immediate)