As part of diversifying portfolios, private markets can help to reduce risk and generate alpha.Getty Images
Jillian Bryan often sees a familiar pattern when new clients transfer portfolios to her wealth management practice. On paper, the holdings tend to look solid, diversified across equities and bonds. When markets turn volatile, the weaknesses quickly become apparent.
“What I often see is a long-only portfolio. It will work if the market is up, but the second the market’s not, there’s no plan,” says Ms. Bryan, a senior portfolio manager and advisor for TD Wealth Private Investment Advice in Vancouver.
For decades, the 60-40 portfolio – 60-per-cent equities and 40-per-cent bonds – served as the backbone of wealth management. Equities delivered growth, while bonds helped cushion volatility. In recent years, that balance has been questioned, particularly by advisors working with high-net-worth clients whose portfolios must navigate more complex markets and longer investment horizons.
The turning point for many came in 2022, when rising interest rates triggered declines in both stocks and bonds. The diversification investors expected from fixed income largely disappeared. Today, an expanding range of private market investments, from private equity and credit to infrastructure and real estate, are reshaping how affluent investors construct their financial portfolios.
Alternatives come in many forms. Liquid alternatives can be accessed through traditional investment vehicles and offer daily liquidity. In contrast, private markets typically involve longer investment horizons but provide exposure to assets that are not traded publicly.
Institutional investors have long recognized these diversification benefits. Many university endowments and pension plans allocate large portions of their portfolios to private-market assets.
Many wealth advisors are applying similar thinking for affluent clients.
“The modern portfolio isn’t just stocks and bonds any more,” Ms. Bryan says. “It can, and in many cases probably should, include private equity, private credit and infrastructure.”
One force driving the shift is a structural change in the economy. A growing share of companies now remain private for longer periods, meaning public-market investors may miss the most dynamic phases of corporate growth.
The opportunity set is vast, says Meric Koksal, managing director and head of product at CIBC Global Asset Management in Toronto. “Ninety per cent of U.S. companies are now private.”
Investors who focus exclusively on public markets may overlook much of the broader economy.
Private investments can also offer diversification benefits because their valuations tend to move differently from public securities.
“Private equity historically has delivered strong return potential because investors are capturing an illiquidity premium,” Ms. Koksal says.
Access has steadily improved. Historically, private equity funds required large minimum investments and decade-long lockups. Today, many vehicles offer lower-entry thresholds and more flexible liquidity structures.
Richard McDonald, who manages assets for roughly 200 high-net-worth families at North Rock Advisory in Calgary, part of Scotia Wealth Management, says the shift toward private markets is often driven by income needs. “With traditional fixed income yields where they are, we’ve had to look elsewhere.”
He increasingly favours private credit strategies tied to real assets. One example is the sale-leaseback model. Corporations sell facilities such as distribution centres to investors and lease them back under long-term agreements. Under triple-net lease structures, tenants pay rent along with property taxes, insurance and maintenance costs.
For investors, the result can be predictable income streams backed by contractual agreements. “You know you’ve got stable, steady cash flow for an extended period of time,” Mr. McDonald says.
At Tozser Wealth Management in Calgary, part of National Bank Financial, advisor Jennifer Tozser also views alternatives as an essential part of portfolio construction. Rather than relying heavily on bonds, she allocates roughly 30 per cent of portfolios to alternative strategies, including structured products and private investments.
Ms. Tozser selectively invests in individual private companies rather than large pooled funds. She typically limits exposure to 2 per cent to 5 per cent of a client’s portfolio per company to manage liquidity risk. The goal is to introduce strategies that behave differently than traditional assets, helping portfolios withstand a wider range of market environments.
“As soon as you diversify your risk, you decrease risk. If you decrease risk, you generate alpha,” she says.
For Ms. Bryan, the lesson is clear every time she reviews a newly transferred portfolio. A portfolio that relies entirely on rising markets may work in good times, but a well-constructed one requires more than that. It needs a plan for when markets move the other way, and accessing the private markets can be a key part of that.