The Long Game: Why Private Markets Thrive in Market Turmoil

As Ben Graham wisely noted, “In the short term, the market is a voting machine. But in the long run it is a weighing machine.” Imagine focusing on the long run, allowing your portfolio to deliver consistent results over time without being disrupted by cable TV headlines or rapidly changing daily account updates.

This kind of long-term focus is especially relevant after two years of calm markets and strong returns—especially for US large-cap stocks—as the past few months remind us that markets can be turbulent, and trends don’t last forever. Some investors take these gyrations in stride, knowing that markets have historically risen over time. But many, especially those who count on their portfolio for lifestyle or spending needs, have felt a creeping sense of unease. Fortunately for those investors, private markets are proving to be a reliable and promising option as public markets endure dramatic swings.

The Hidden Strength of Private Markets

In the past, private markets were seen as “alternative” investments, often taking a backseat to public ones. But as the recent spike in market volatility reminds us, they’ve moved from being alternatives to essential components of investment portfolios. Unlike public assets, private markets are not priced daily, so they’re less prone to the whipsawing effects of market sentiment. This structural advantage allows private assets to provide some stability while enhancing risk-adjusted returns, making them integral for both institutional and individual investors.

What sets private markets apart is their resilience, thanks to their illiquid nature. Unlike publicly traded stocks, which can fluctuate wildly, private investments are generally shielded from the rollercoaster of daily (or even intraday) swings. That’s because valuations for private market investments are typically reported on a quarterly basis. While the underlying volatility remains—cash flows are still subject to the laws of economic gravity—the absence of daily price swings means you’re spared the psychological pressure to react impulsively during market turbulence. Even when valuations dip, the lack of constant market updates allows for a more measured, long-term approach.

In other words, private market net asset values only exist on paper, whereas their true values are realized only when investors sell their positions. Not only does this alleviate the daily stress investors may experience watching traditional investments see-saw, but the extended lockup periods deter herds of skittish investors from indiscriminately dumping their positions at the first sign of worry. After all, public companies face constant pressure to target short-term metrics at the potential expense of long-term performance, while private assets face no such demands. As a result, private markets offer a singular advantage: the ability to focus on strategic growth rather than reacting to short-term market moves.

Patient Capital Can Be a Strategic Advantage

One of the key benefits of private markets is the concept of patient capital. Unlike public markets, where investors can buy or sell at any point, private markets often have multiyear lock-up periods for invested capital. So, when markets get rocky or overly expensive, private funds can cease making investments and wait for more favorable conditions. What’s more, lockups reduce the risk of being adversely affected by other investors’ panic-driven decisions. In public markets, the selling pressure from spiraling anxiety can upend even the most steadfast long-term strategy. But in private markets, investors share an inherently long-term mindset, reducing the risk of co-investors dragging down your investment when they bail.

Patient capital also gives managers more latitude. Since private assets usually boast multiyear terms in which to deploy the capital committed by investors, private funds managers can pump the proverbial brakes when faced with a universe of less attractive opportunities. This phenomenon has coined the phrase “dry powder,” signifying raised capital that’s not yet kicked into action. While it’s hard to buy the dips in private markets—because deals take longer to strike than punching “buy” on a keyboard—a prolonged downturn allows private investors to seize attractive entry points when other investors are fearful or overextended, building returns from a better starting position.

And some types of private investments can be more agile. Hedge funds, in particular, stand out as private market strategies that thrive amid volatility. Unlike most equity portfolios that struggle during market swings, hedge funds welcome these conditions. They rely on volatility and dispersion between markets or security valuations to drive outperformance. Strategies such as relative value and global macro benefit from wholesale sell-offs, acting as arbitrageurs that force asset prices to converge back to fair value. This ability to capitalize on market swings makes hedge funds a valuable component of a diversified portfolio.

Sophisticated Asset Allocation: Finding the Optimal Balance

To strike the right balance between public and private market exposure, sophisticated asset allocation modeling is essential. It helps investors size an appropriate allocation, while ensuring portfolios align with changing conditions and individual needs. By taking a fresh look at their asset allocation, investors can achieve diversification across asset classes, including private equity, private credit, real estate equity and debt, and hedge funds. This diversification provides a buffer against the volatility experienced by public investors, allowing for a clearer head during turbulent times.

Market sell-offs can be nerve-racking, and it’s understandable to feel a creeping sense of panic. Yet in a world where market volatility can send public investments on a rollercoaster ride, private markets offer a steady hand. Yes, they’re less liquid than public market investments, requiring greater due diligence while imposing longer time horizons before showing a return on investment. But while private investments demand patience, the rewards are usually worth the wait. As we enter a new era of investing, embracing the long game through private markets can help investors thrive amid market turmoil, ensuring portfolios are resilient and positioned for success.