The “alternative” way in investments

Interest in alternative private market investments continued to grow. This was initially driven by larger institutional asset owners pursuing the “endowment model” or “Yale model,” popularized by legendary investor David Swenson, chief investment officer of Yale’s endowment for more than 30 years.

He took over the leadership of Yale’s endowment in 1985 and remained CIO until his death in 2021. During that time, he grew the endowment’s asset base from $1 billion to over $30 billion. of dollars.

The success of the model and Swensen’s willingness to share his insights in his bestselling book, Pioneering Portfolio Management, raised awareness of the opportunities available in alternative investments.

More recently, public market investment valuations have prompted investors to consider adding alternative investments to diversify their portfolios, access less efficient markets and add yield to portfolios that have traditionally focused on government bonds. Top quality state and corporate currently offering historically low yields.

The Economist magazine recently argued that continuing to label private investments as “alternative” investments, or Alts, was absurd given the tremendous growth in assets allocated to them. Private equity firms manage a record $10 trillion, equivalent to about 10% of total assets worldwide. Many of the largest investors allocate 10% to 50% or more of their portfolios to private markets.

As the number of publicly traded companies declines and private companies stay private longer and achieve much higher valuations before entering the stock markets, the case for private company ownership has grown.

Private companies have been able to access enough capital through private market investors that “going public” by staging an initial public offering (IPO) is often not necessary to fuel a continuous growth. Instead, private market investors are funding this growth and earning a significant return on their investment as the company’s valuation continues to grow. The eventual IPO is no longer an opportunity for outside investors to participate in the company’s growth, but rather a liquidity event allowing private investors to sell their holdings and recognize private market gains. That may have made private market exposure even more valuable now than when Swensen began his push in the mid-1980s.

As private equity managers sought to expand their pool of potential clients, they embraced new investment vehicles that increase liquidity. This overcomes one of the major drawbacks of private market allocations, the potential for locking up invested capital for nearly a decade.

Another oft-cited concern is the historically high level of fees in alternative investments. As private market investment managers began to compete for new clients and fee visibility increased, costs began to fall on the more accessible funds in the space.

Although the Yale model is not suitable for all investors, private markets are becoming more accessible within traditional investment accounts. For those with the ability to reap the potential illiquidity premium offered by these investments, and a knowledgeable advisor to guide them, this is a big step forward.


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