Private markets conversations your clients aren’t having, but should 

The structural complexities of private markets are well documented. Capital is called gradually, returns can be negative in the early years, valuations typically lag, and the denominator effect can result in an allocation overweight after a public market drawdown.

Experienced Wealth Managers understand this. Not all of their clients do - and that gap is where private market programmes can be undone. The problem is not that clients are unsophisticated. It is that private markets ask them to evaluate their portfolio in an entirely different way from everything else they own, and nobody has explicitly told them that the rules have changed.

A client who invests in public equities, bonds, and cash receives a portfolio valuation that updates continuously. On any given day, they can see what their portfolio is worth vs. a month ago and form a view on whether their wealth manager is delivering for them. That feedback loop is so deeply embedded in how most clients think about investment performance that it operates almost unconsciously.

Private markets break that loop. Valuations are typically quarterly and can lag two to three months after quarter-end. In the early years of a commitment to a closed-end fund, the portfolio will almost certainly show negative returns while fees are charged, and capital is slowly deployed, this is known as the ‘J Curve’ effect and many clients are not aware that this can occur. A client watching their private markets allocation underperform cash for eighteen months, with no clear explanation of why, is a client who will likely ask to exit.

The wealth manager who front-loads that conversation and explains the J-curve before the client experiences it, – is often the one who earns their clients trust and retains their allocation in the early years.

One of the more counterintuitive features of private markets is that stable valuations can be a sign of stress rather than resilience. During the 2022 public market drawdown, many private equity funds continued to report steady or modestly positive valuations while listed equities fell 20% or more. Some clients interpreted this as private markets outperforming. In reality, it largely reflected the lag between market events and the appraisal process — the write-downs came later, and were smaller, partly because private company earnings had held up better than public market sentiment, but partly because the valuation methodology simply takes time to reflect new information.

Clients who understood this were able to evaluate their allocation clearly. Clients who did not were either falsely reassured or, when the delayed markdowns eventually arrived, confused about why their private portfolio was falling after public markets had already recovered.

Neither outcome reflects a failure of the investment. Both reflect a failure of the conversation.

We believe the most effective private markets client conversations share a few characteristics. They happen before a commitment is made, not at the first sign of difficulty. They set specific expectations - not just “returns may be negative early” but “your allocation will likely show a loss for the first one to two years, and here is why that is consistent with the fund performing exactly as intended.” And they give clients a way to evaluate the investment that does not rely on quarterly mark-to-market returns.

That last point is harder than it sounds. In public markets, price is a reasonable proxy for performance, at least over short periods. In private markets, the relevant signals are different: the quality and pace of capital deployment, the operational progress of portfolio companies, the vintage year context, and the pattern of distributions relative to expectations. These are harder to communicate than a simple return number, but they are the metrics that actually tell you whether an investors private markets programme is working.

Clients who have been given this framework - who know what to look for and why - are more tolerant of the short-term volatility that is inherent to private markets. Clients who have not been given it will judge the allocation by the only standard they have, which is the one that does not apply.

There is a practical dimension to this that is easy to underestimate. In our view, the best time to have the private markets education conversation is not when a client is enthusiastic about committing capital. It is slightly before that moment - when the client is genuinely open to understanding the mechanics rather than simply looking for confirmation that the decision they have already made is a good one.

Once capital is committed and the J-curve begins to bite, the conversation takes on a defensive quality that makes it less effective. The wealth manager explaining the J-curve to a client who is watching their allocation lose value looks like they are managing expectations after the fact. The same conversation held six months earlier, lands entirely differently - as evidence of expertise and transparency rather than damage control.

Private markets are a long-term proposition. The clients who stay invested through the full cycle, who resist the urge to exit at the bottom of the J-curve, and who allow the distribution phase to play out are the ones who capture the illiquidity premium that justifies the complexity in the first place. Getting clients to that point is not primarily an investment problem. It is a communication one.