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The Markets September 23, 2025
Why Private Markets Are Essential for Long-Term Investors
Two thought leaders from Ares Management, including a former director of the PBGC, explain why exposure to private markets can improve outcomes.
Reported by Charles E.F. Millard and Avi Turetsky
Avi Turetsky
Charles E.F. Millard
President Donald Trump’s recent executive order encouraging the use of private market assets in 401(k)s and other defined contribution plans is a potential game-changer for retirement plans across America.
It will prompt many questions and rulemakings from the Department of Labor and the Securities and Exchange Commission regarding transparency and fiduciary duty. But it also prompts the need to challenge, test and establish the benefits of private markets for DC plans in the first place.
Institutional investors have steadily increased their allocations to private market assets over the past couple of decades. The asset classes include private equity, private credit, real estate and infrastructure. According to the Center for Retirement Research at Boston College, the average allocation of U.S. public pension funds to private markets assets grew to 17% in 2023 from about 6% in 2001. We believe this increase is for good reason and that DC plan participants could be well-served by this approach.
It is important to point out that we are not suggesting that individual plan participants should be free to make large, unrestricted allocations to whichever private equity firm appears most appealing to them. However, we believe investors can benefit from adding portfolio exposure to private markets through professionally managed target-date funds and managed accounts, which already make careful and balanced allocations under fiduciary oversight to investments along an age-appropriate glide path.
We know that there are critics of private assets who disagree. Some claim that investors underestimate these investments’ illiquidity, complexity and cost. Some even claim these assets underperform their public market counterparts.
But these critics miss the mark, often widely. They overlook the structural advantages that private markets offer to long-term investors—including access to a broader opportunity set, differentiated risk exposures and behavioral benefits that support disciplined investing. When properly understood and appropriately allocated, private markets can play a vital role in helping investors better achieve their goals.
Illiquidity Is a Feature, Not a Flaw
Critics argue that the illiquidity of private markets makes them more difficult to flexibly include within a DC portfolio. They are correct that private investments are indeed less liquid than public stocks or bonds—but that’s precisely the point. Illiquidity imposes discipline: It helps prevent panic-selling during downturns and encourages a long-term mindset. In this way, illiquidity is a feature, not a flaw.
Private assets are generally not priced daily and have less sensitivity to short-term market swings than public assets do. Critics argue this difference masks volatility. However, many investors find that lower observed volatility helps them stay committed to their strategy. As with the illiquidity discussed above, the smoother ride is not just cosmetic—it can reduce reactive decisionmaking and support long-term performance.
Similarly, private market managers frequently argue that this volatility dampening enables them to better position their portfolio companies for long-term growth, by operating strategically, rather than tactically driving toward the quarterly earnings targets public companies are expected to hit.
Long-term investors are watching a movie, not a snapshot. They are investing, not trading. The fact that certain assets may be up or down on a certain day or at a certain moment is far less important than the long-term results. Reducing observed volatility allows investors—whether private market managers or the investors in their products—to maintain the long-term focus they need.
Private Market Complexity Creates Opportunities for Value
Public market assets are easy to access and cheap to trade. They can be purchased at the click of a mouse. There are terabytes of public data readily available about them, and the cost to make these investments is near zero. Public assets clearly have an important role to play in a portfolio, given their liquidity and flexibility. And we do believe that there are public market managers who are able to deliver alpha. However, private markets, by being more complex and less commodified, offer managers additional sources of value creation.
Private markets require skilled professionals to source deals, negotiate terms, manage operations and determine exit strategies. Private market investors can benefit from complex investment structures, as well as asset types—airports, sports teams—that are complex by design. This type of expertise is not free, but it can generate value. The real question for fiduciaries is not just about fees, but also about net, risk-adjusted returns.
Private Markets Have Performed
Skeptics often argue that private markets do not reliably outperform public markets after accounting for fees, challenges accessing top-tier managers and the wide dispersion in fund performance. Some suggest that private equity returns merely reflect leveraged small-cap exposure—replicable in public markets—rather than true alpha.
But long-term data tell a different story. A 2022 study in the Financial Analysts Journal found that global buyout funds outperformed the MSCI All Country World Index by about 1 to 5 percentage points over various historical time horizons (five, 10, 15, 20 and 25 years). The outperformance can decline when using different benchmarks, higher leverage or looking at shorter time periods, but the story remains generally consistent. A separate analysis of 94 U.S. state pension plans, conducted by consultant and manager Cliffwater, found similar results: 11% net annualized returns for private equity from 2000 to 2023, compared with 6.2% for public equities.
Private credit has also demonstrated a consistent edge. Studies in 2024 and 2025 found that private credit, as measured by the Cliffwater Direct Lending Index, outperformed liquid market alternatives significantly over the last five-, 10- and 20-year periods.
In short, while performance varies by manager and market cycle, evidence supports private markets as a valuable long-term complement to public investments.
The Public Market Is Shrinking
Private markets offer access to trillions of dollars of investment opportunity that are, by definition, not available in public markets. In 1996, there were more than 8,000 publicly traded companies in the U.S.; today, there are roughly 4,000. Meanwhile, the number of private-equity-backed companies is estimated to have surged to more than 10,000. While we acknowledge that public markets have also been growing by market capitalization, the diversification available through public markets has clearly been declining. In contrast, the private economy is not just growing—it is becoming the dominant arena for innovation and capital formation.
Additionally, private credit and infrastructure offer investment structures fundamentally different from public stocks and bonds. Private credit often provides investors downside protections, covenants and negotiated terms that reduce risk and enhance returns. Infrastructure investments often provide long-duration, inflation-linked cash flows backed by essential services not correlated to other asset classes—a powerful diversifier in uncertain markets. Private real estate can also offer access to different parts of the risk-return spectrum than public real estate (e.g., value-add and opportunistic vs. core) and can offer access to niche sectors that do not have the scale necessary for inclusion in public real estate investment trusts.
A Different Kind of Diversification
Private markets often provide exposure to smaller companies with unique geographic, customer demographic and economic profiles. These businesses are less correlated with large-cap public equities and can offer differentiated sources of return. In factor terms, private markets may tilt toward size, value and illiquidity—all of which have historically been rewarded.
Additionally, public markets are dominated by a small number of large companies—the Magnificent 7 tech giants represent more than 30% of the S&P 500’s market cap. Private markets can help diversify away from this very concentrated exposure.
Private Markets Belong in Most Portfolios
Private markets are not a niche or speculative corner of the investment universe—they are a vital and growing part of the global economy. They offer investors access to companies, sectors and structures that public markets increasingly overlook or cannot invest in. For long-term investors like participants in DC retirement plans, they can provide differentiated sources of return and behavioral advantages that support disciplined investing.
While no investment is without trade-offs, the evidence shows that private markets can enhance portfolio outcomes when thoughtfully integrated. Their role in a modern investment strategy is not just defensible—it’s indispensable.
Charles E.F. Millard is a former director of the U.S. Pension Benefit Guaranty Corporation and a senior advisor at Ares Management. Avi Turetsky is a partner in and the head of the quantitative research group at Ares Management.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.
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