In an environment of low yields and low-to-moderate risk premia, we believe investors need to look beyond traditional liquid asset classes in order to generate meaningful returns.
Private markets can provide exposure to return drivers that are simply not available in liquid markets including illiquidity and complexity premiums, hands-on value creation and other factor exposures.
We believe the private markets represent an important part of the global opportunity set for long-term investors, offering exposure to a diversifying mix of return drivers. One driver of the returns from a private markets portfolio will be the illiquidity premium, but this is by no means the only reason for investing. Just as important a determinant of success in private markets is the ability to identify and access the highest caliber managers. We suggest that investors consider their tolerance for illiquidity and look to put in place well-diversified rolling programs of private markets investments in a risk-controlled and cost-controlled manner.
At Mercer, we believe a well-diversified private markets program populated with best-in-class managers should be able to deliver a return premium (above a comparable public market exposure) of around 1%–4% p.a. (net of fees) over a full market cycle.