Asset allocation has historically focused on traditional asset classes – equities, fixed income and cash instruments. However, individual investors have increasingly become interested in the potential of alternative assets – such as private equity, private debt, real estate and hedge funds – to improve portfolio performance over the long term, especially given the outlook for continued modest traditional market returns.
Alternative investments can play distinct roles in a portfolio, from enhancing return to diversifying risk to increasing income.
Why private equity?
Private equity comprises 86% of the total equity investment universe. By only investing in public equities, individual investors are limiting their equity exposure to just 14% of the market.
The primary motivation for investing in private equity is the potential for return enhancement. Over the long term, private equity has delivered double-digit annualized returns across multiple time periods.
What is private equity investing?
Private equity investing is defined as equity investments made in companies that are not publicly listed and traded on a stock exchange. Private equity investment opportunities fall into two main categories generally characterized by the company’s lifecycle stage and how the company uses capital:
1) Buyouts are investments in existing private companies that are expanding through growth strategies or fundamental business change.
- For example, investments may be made in businesses that are looking to expand through internal growth and generation of business efficiencies. Or, to support business strategies, such as growth through acquisitions or industry consolidation, management succession or refinancings and recapitalizations of both healthy or financially/operationally troubled companies.
2) Venture capital is the financing of start-up or emerging companies developing new business opportunities.
- Most venture capital investing has focused on new technologies in software, telecommunications, materials, biotechnology and medical devices. In addition, many service companies and consumer-oriented businesses have been launched and developed with venture capital.
- Common strategies include seed, early stage and expansion/growth equity.
Fundamental characteristics of private equity investing
The very nature of private equity investing – whether buyout or venture capital related – defines its investment characteristics in terms of both risk and potential rewards. Investors should assess their risk appetite, cash flow needs and return requirements, and be sure that they understand and are comfortable with these fundamental characteristics of private equity:
- A long-term horizon with unique cash flow patterns: The total life of private equity fund investments typically extends over a period of 10–12 years from capital commitment to final distributions. Committed capital is not deployed immediately, as with typical investments made in the public markets. Rather, cash must be available for investment as portfolio companies are identified and their growth strategies implemented. The distributions vary in timing and magnitude over the life of the investment. Recent innovations in private equity fund structures have simplified access to the asset class, eliminating the need for periodic capital calls and reducing time horizons (see A simplified way to access private equity).
- Illiquidity: Commitments are generally for the long haul. Unlike many other alternative investments, private equity investments typically do not have reinvestment or redemption features. Further, for many investors, the ability to sell their private equity interest can be limited by their investment agreements. Even if investors can sell positions in the secondary market, interests generally trade at a discount and the market itself can be cyclical, further impacting pricing. Here again, new fund structures provide the opportunity for periodic liquidity, subject to constraints (see A simplified way to access private equity).
- The J-curve effect: The J-curve represents the pattern of returns an investor can expect to realize from a private equity fund over time, from inception to termination. A private equity fund will often show a negative return in its early years, when fees and start-up costs are incurred, and investments considered to be behind plan are written down – all prior to any returns to the investor. Investment gains will usually come in the later years as portfolio companies mature, increase in value and are ultimately exited with returns realized.
- Attractive return potential: The above characteristics define some key differences between private equity investing and public equity investing. They also explain why private equity investors anticipate a higher level of compensation for investing in private versus public equity opportunities – an expectation that private equity investing has met over the long term.
Who invests in private equity?
Qualified institutions and high-net-worth individuals typically invest in private equity through fund structures. These generally take the form of limited partnerships managed by general partners (GPs) who raise capital from investors, invest alongside these limited partners (LPs), identify and select portfolio company investments and generally have a significant level of engagement in the management of these companies. Investors also gain exposure to private equity by co-investing alongside GPs in unlisted operating companies.
Additionally, investors can access the secondary market for private equity, whereby a limited partnership or company interest is transferred from one investor to another. This market has developed and matured over time and interests are generally purchased at a discount, although the market can be cyclical and the quality of available assets varies, highlighting the importance of informed underwriting and investment selectivity.
While institutions with scale and relationships can access private equity funds and companies directly, individual investors are increasingly gaining exposure to private equity through professionally managed commingled vehicles and tender offer funds.
How should investors allocate to private equity?
Once a prospective investor understands the essentials, the natural next question is how to allocate to private equity within a diversified portfolio. Ultimately, this comes down to how much to allocate and whether to fund a private equity allocation from traditional equities and/or bonds.
Private equity is a potent diversifier. As illustrated in the chart below, allocating as little as 5% to a traditional 60/40 portfolio (funded equally from equity and fixed income) would have increased the return from 8.73% to 8.89% and reduced volatility from 9.60% to 9.19% – nearly a 1.83% increase in performance while reducing volatility 4.27% on a relative basis. Increasing the private equity allocation typically only magnifies that impact. Private equity allocations of 10% and 15% shift the portfolio further up and to the left, illustrating private equity’s ability to further increase the overall portfolio’s return and reduce volatility.
Whether the private equity allocation is funded from equities and bonds equally, equities only or bonds only, the outcomes are virtually the same.
In summary, an allocation to private equity can serve as a versatile tool within portfolios. As demonstrated in the scenarios above, a consistent theme emerges: The portfolio’s risk-adjusted profiles were enhanced relative to a traditional 60/40 portfolio by increasing returns and reducing volatility. Given private equity’s versatility and the uniqueness of individual portfolios, there is no one-size-fits-all approach to the right allocation and how to fund it. Therefore, working with a financial advisor is key.
To learn more about how private equity is managed and how individual investors can access private equity, see A simplified way to access private equity.
About the J.P. Morgan Private Equity Group
J.P. Morgan is a global leader in investment management with $3.9 trillion in assets under supervision (as of June 30, 2025) across equities, fixed income, multi-asset solutions and alternatives. Led by a global team of over 70 professionals operating from New York, London, Hong Kong and Mumbai, the J.P. Morgan Private Equity Group (PEG) manages over $35 billion of assets on behalf of a diverse group of leading institutions and individual investors. Founded in 1980, PEG is one of the longest-standing platforms in the industry. Over the past 45 years, PEG has cultivated a deep network of general partner (GP) relationships and sits on over 250 advisory boards. PEG’s collaborative partnerships with top-tier GPs and continued participation in primary investments also make it a preferred strategic partner for co-investment and secondary opportunities.