Private markets as a strategic portfolio supplement

Equity markets are going from strength to strength: the S&P 500 index reached new all-time highs in the spring of 2025. Valuation levels are ambitious: at 32.38, the Shiller (capital-adjusted) P/E ratio hit its highest level since the dotcom bubble. The “Warren Buffett indicator” – the ratio of US market capitalisation to gross domestic product – also indicates overheating. At 1.8, it is well above the historical average and even above highs seen in the year 2000.

The risks of concentration
As another warning signal, market capitalisation is increasingly concentrated on just a few large tech companies. The so-called “magnificent seven” – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – now account for more than 30 per cent of S&P 500 market capitalisation, compared to only 13 per cent back in 1990. Such concentration holds risks because a price collapse for one of these heavyweights may indeed affect the entire market.

Falling risk premiums, rising volatility
The so-called equity risk premium – in other words, the premium for the risk of equity investments versus safe government bonds – has fallen to its lowest level in 25 years. Yet at the same time, geopolitical uncertainty, trade conflicts and economic challenges are on the rise: factors set to increase market volatility.

Private markets as a strategic portfolio supplement
Private markets are gaining importance in this environment: exposure to unlisted enterprises offers a clearly broader investment universe that is less susceptible to short-term volatility. While the number of listed US corporations has fallen from more than 8,000 in 1996 to less than 4,000, there are now close to 18,000 privately-owned enterprises with annual sales exceeding 100 million US dollars.

Studies have shown that private equity has yielded an annualised net return of around 15 per cent over the past 20 years, clearly outperforming the S&P 500 (9.2 per cent). Volatility is also lower; the value of private equity funds fluctuates less dramatically than listed equities.

Private markets are an indispensable addition to a balanced portfolio, especially in this environment of high valuations and increased uncertainty in listed markets. Private markets provide access to attractive returns, lower volatility and broad diversification beyond the “magnificent seven”. That is why institutional investors such as pension funds and foundations have already allocated around one-quarter of their portfolios to private equity. This is a trend that is increasingly open to retail investors within the framework of an EU initiative: they now have the option of investing into European Long-Term Investment Funds (ELTIFs). These instruments open up private markets asset classes through lower entry barriers.