By the late 2000s, stock market participation had grown to over 60% of U.S. households. This rapid growth, from under 40% just a couple decades earlier, was caused by several factors including new technological invention sand innovations and media coverage of financial markets.
Financial products such as ETFs, index-based funds and growth in mutual funds made investing easier to understand and gave investors access to large parts of the market without having to be experts in any specific area.Furthermore, technology reduced costs for delivering these financial products, which allowed previously inefficient paper-based processes to be replaced with automated systems.
But now, there is another shift happening in the investment landscape.
Private markets and alternative investments are growing at a rapid pace and are going through a similar evolution. These investments include private equity and credit products, as well as a range of real-world assets such as real estate, infrastructure and commodities. Advisors increasingly have access to a broader range of investment opportunities and fund structures that are easier to allocate into client portfolios. And just like it did with public markets, technology is a major reason why these products have become more accessible.
Investors in private markets gain exclusive access to opportunities that are not readily available in public markets. While public markets have built many products based on a relatively small number of underlying assets, alternatives expand the universe of assets across a broad set of underlying investments not typically available to most investors. And new technology in the space has pretty much replicated the investor experience in public markets for private markets.
What’s more, the longer investment horizons characteristic of private markets allows investors to ride out short-term market fluctuations, positioning them for greater success in the long run. As highlighted by CAIA's insights that note these investment vehicles can help responsible investors reap the long-term benefits of both risk mitigation and return enhancement compared to traditional public market assets, private markets provide the potential for superior risk-adjusted returns, giving investors an edge in navigating market volatility. In fact, further research from Bain & Company indicates that private assets have the potential to outperform public market equivalents by a substantial margin of 200 to 300basis points over time. This long-term focus enables investors to tap into unique opportunities for wealth creation and growth that are not as readily available in public markets.
The growing adoption of private markets and alternative investments represents a significant shift in the investment landscape. As investors look to diversify their portfolios, private markets continue to gain prominence for their potential to unlock new investment opportunities and offer a larger investable universe.By embracing the unique potential of private markets, responsible investors and their advisors can navigate this landscape by understanding the new technologies, platforms and financial products that dramatically expand reach without adding cost and complexity.