Private Markets vs. Public Markets: What Allocators Need to Know
Ask most people where investing happens and they will point to a stock exchange. It is a reasonable answer, and an increasingly incomplete one. Alongside the public markets sits a parallel financial universe, worth close to $15 trillion to $20 trillion globally, depending on definition. Understanding how it works differently is the starting point for everything else.
Public vs. Private Markets: The Core Difference
A public market is one where anyone can buy a piece of a company through an exchange, at a price that updates every second, with the company obliged to publish results on a fixed schedule. A private market is everything else: ownership stakes and loans negotiated directly between parties, priced by agreement rather than by an order book.
The main categories are private equity, venture capital, private credit, and real assets such as farmland, infrastructure, and real estate. Different instruments, same logic: capital committed directly, for a long time, without a screen quoting the price back to you.
Further reading: Farmland as a strategic asset.
Why Private Markets Now Hold More Weight
Here is the shift that changed the stakes. US stock exchange listings have fallen by roughly 40 percent to 50 percent from their 1996 peak of just over 8,000 companies. Over the same period, the number of US companies backed by private equity rose from about 1,900 to 11,200.
Companies are not disappearing, they are staying private, or being acquired. Research analyzing the trend attributes much of it to a sharp rise in acquisitions of private companies and a fall in IPOs, alongside the rising cost of being listed. The practical consequence is that a growing share of value creation now happens out of view of public investors.
5 Key Differences Between Private and Public Markets
Liquidity. Public shares sell in seconds. Private positions often cannot: capital is typically committed for five to ten years. This is the fundamental trade, and everything else follows from it.
Pricing and transparency. A public stock has a price because thousands of people vote on it continuously. A private asset is valued periodically, by appraisal. That means less noise, but also genuine uncertainty. The IMF has flagged stale and potentially subjective valuations as a real vulnerability in private credit specifically.
Time horizon. Public companies answer to quarterly earnings. Private owners can spend three years rebuilding a business without explaining themselves every ninety days. That freedom is a structural advantage, and much of why companies stay private.
Control. A public shareholder owns a fraction and has essentially no say. A private equity owner typically controls the board and can replace management.
Dispersion. In public markets an index fund gets you the market return. In private markets there is no index to buy, and the gap between good and bad managers is enormous. Selection is not a refinement here, it is the whole game.
The Illiquidity Premium: Do Private Markets Really Outperform?
In principle, private investors earn a premium for accepting illiquidity and complexity. The academic evidence broadly supports this for buyouts: studying nearly 1,400 US funds, Harris, Jenkinson, and Kaplan found buyout funds consistently outperformed public markets, beating the S&P 500 by roughly 20 percent to 27 percent over a fund's life, or more than 3 percent a year. That figure reflects the average across the full sample of funds, not a top-quartile or best-case subset. Their later work adds an important qualifier: for vintages after 2005, returns have been roughly level with public markets.
It is worth knowing the counterargument, because sophisticated investors take it seriously. AQR's Cliff Asness argues that private assets' famously low volatility is largely an artefact of infrequent pricing rather than lower risk, what he calls volatility laundering. His sharper point: if investors actively prefer not seeing prices move, illiquidity stops being a bug they are paid to bear and becomes a feature they pay for, which would compress the very premium that justifies the asset class. Analysts who have examined the claim tend to conclude that volatility laundering is real, without concluding that private markets are therefore a poor investment.
The honest reading: the premium exists, but it is not automatic. It is earned by choosing well, and McKinsey's assessment is that alpha is now less a product of market momentum and increasingly something that must be manufactured through skill.
What This Means in Practice
The framework above explains why private markets behave differently. What it does not yet explain is what that difference costs, how long it actually takes to pay off, and how an investor gets exposure to it in the first place. Five mechanics matter most.
Fees eat more than the headline suggests. The standard private equity fee model is often called two and twenty: a two percent annual management fee on committed capital, plus twenty percent of profits above a hurdle, typically eight percent, paid to the manager as carried interest. Academic work on the topic finds that the present value of management fees alone over a fund's life runs to roughly 20 percent of committed capital, a figure comparable in size to the manager's carry itself. Fee schedules vary meaningfully by fund size and strategy, and larger allocators routinely negotiate lower rates or fee offsets, so the headline "two and twenty" is a starting point for due diligence, not a fixed cost every investor pays.
The J-curve determines when money actually comes back. Private capital returns typically dip negative in the early years, as capital is called and fees are charged against a still-developing portfolio, before turning positive as portfolio companies mature and are sold. Distributions tend to only start exceeding contributions around years five to seven of a fund's typical ten to twelve year life. That timing, not just the headline lock-up period, is what an investor is actually committing to.
How access works has changed, but the trade offs have not disappeared. Traditional private funds are closed end limited partnerships that call capital over several years and return it irregularly, over a decade. Newer evergreen and interval fund structures offer periodic redemption windows and have become a common way to bring private credit and private equity to smaller allocators. Those redemption windows are typically capped, often around five percent of net asset value per quarter, and SEC investor guidance flags that non-traded, redemption-limited structures still carry real illiquidity risk despite their more accessible packaging, including the possibility that a fund suspends redemptions altogether.
Vintage year is a risk factor, not a formality. When a commitment is made, a fund's vintage year, is itself a major driver of dispersion, independent of manager skill. In Cambridge Associates' benchmark data, US private equity returns across the nine largest vintage years in the 2024 index ranged from 0.7 percent to 25.3 percent, with funds raised before 2020 faring notably worse than those raised afterward. This is the practical argument for committing across multiple vintage years rather than concentrating a private markets allocation in a single fundraising cycle.
Illiquidity is real, but not always absolute. A secondaries market has grown around exactly this problem: an investor who needs to exit a private fund commitment early can sell the stake to a specialist buyer. Dedicated secondary market capital reached a record $327 billion in 2025, with transaction volume also setting new highs. The trade off is price: sellers typically transact at a discount to net asset value, so secondaries provide a liquidity option, not full liquidity, and the discount tends to widen precisely when markets are stressed and the option is needed most.
Why the Best Portfolios Hold Both
The right framing is not public versus private, they do different jobs. Public markets offer liquidity, transparency, breadth, and low cost access. Private markets offer access to companies that are not on an exchange, longer horizons, real ownership influence, and returns that do not track the daily mood of the market.
The world's most sophisticated allocators have concluded the answer is both: family offices now hold around 40 percent of portfolios in alternatives. Access is widening too, though not without concern: the IMF has warned that growing retail participation in semi-liquid private credit vehicles raises questions about whether those investors fully understand the liquidity restrictions involved.
Further reading: Risk and Return Analysis of FO Portfolios.
Private markets are no longer the exotic corner of finance. They are where a large and growing share of the real economy now lives, which makes understanding how they differ a basic requirement rather than a specialist interest.
This article is for general information purposes only and does not constitute investment, legal, or tax advice, and should not be relied upon as the basis for any investment decision. Past performance, including the fund performance figures cited above, is not indicative of future results. Private market investments involve significant risks, including illiquidity, and may not be suitable for all investors.
If you would like to discuss how private markets might fit into your portfolio, get in touch with our team.