Synthetic Indexes: Exploring a scalable path to democratizing private markets 

For decades, private markets have been viewed as offering investors a compelling opportunity set, which may include the potential for strong returns, additional sources of diversification, and access to long-term structural themes, in some cases before they become available in public markets. Yet despite this appeal, they have been difficult to access for all but the largest and most sophisticated institutional investors. High investment minimums, illiquidity, limited transparency, and the challenge of building a bench of talent across disparate private markets have long kept most individual investors and smaller institutions on the sidelines.

That is beginning to change. At the heart of this shift are growing industry efforts to expand access to a broader range of investors, a movement widely referred to as the democratization of private markets.

So far, this movement has been most visible through the rise of innovative fund structures designed to address one of the core barriers to access: liquidity. Evergreen and semi-liquid vehicles, which can offer periodic liquidity windows, are enabling some investors to build meaningful allocations to private market strategies without locking up capital for a decade or more.

However, even these structures have limitations. They often remain significantly less liquid than public market funds and can introduce operational complexities. One emerging solution that may help bridge this gap is the development of synthetic indexes for private market assets. 

A synthetic index doesn’t directly invest in private assets. Instead, it seeks to replicate the risk-return profile of private market benchmarks using a combination of public market proxies, factor exposures, and statistical modeling. These indexes can be passive or rules-based and may incorporate leverage, sector tilts, or other design features to simulate the performance of private equity or credit strategies.

In essence, synthetic indexes bridge the gap between private market outcomes and public market infrastructure. They could offer daily liquidity, low cost, and transparency, enabling investors to access the “beta” of private markets without the operational complexity of owning the actual assets.

To be clear, synthetic indexes are not a substitute for direct private market investing. They do not capture the nuances of manager selection, deal sourcing, or illiquidity premia. But they can provide a scalable foundation for exposure to the asset class.

This is especially relevant for investors who are new to alternatives, face operational constraints, or need flexible vehicles for rebalancing and portfolio construction. Just as emerging market ETFs didn’t eliminate active EM managers but rather expanded the investor base, synthetic indexes could complement traditional private funds, not compete with them.

Accurate, timely, and consistent data across private markets is key to making synthetic indexes viable. However, private markets data is often fragmented and opaque, a challenge we aim to address through our collaboration with S&P Global and Cambridge Associates.

Synthetic indexes have limitations: they depend on historical correlations, can’t replicate the unique value of experienced managers, carry model risk, and require rebalancing as performance diverges from actual assets. 

Despite this, they can offer clear strategic value. For advisors and institutions, synthetic indexes may provide a practical way to access private markets for allocation, benchmarking, and risk management—removing traditional barriers to participation.

Much like index-based vehicles expanded into emerging markets two decades ago, synthetic indexes could now broaden access to alternatives, fostering a more inclusive and dynamic investment ecosystem driven by insight rather than scale.