Younger Investors Go Private for Active Exposure

January 22, 2025

By embracing private markets, younger investors have found their own route into active management, suggests Michael Bell, CEO of Meketa Capital, writing in WealthManagement.com.

Bell notes that, according to a recent Bank of America survey of investors with at least $3 million in assets, Gen Z and millennial investors have 17% of their portfolios in alternative investments such as private equity, two to three times the allocation of Gen X and baby boomer investors.

That’s not surprising, argues Bell. Younger investors have longer time horizons and higher risk tolerances, so long-duration assets like private equity are a better fit for them than for older investors. They have also tended to be early adopters of investment innovations, Bell says, being among the first to make forays into cryptocurrency, ETFs, and robo advisers.

The public markets have been less attractive to younger investors. In fact, the Bank of America survey finds, younger investors have only 28% of their portfolios in publicly traded equities, which is roughly half the exposure of Gen Xers and baby boomers.

When they first started investing, older generations didn’t have easy access to private investments, so public stocks became their investment of choice, argues Bell.

In addition, in the past, the public markets gave investors exposure to smaller companies. But with the market cap of a public company now averaging $7 billion – compared to $1.8 billion 30 years ago – the public markets are now dominated by mega-companies.

As a result, some 80% of middle-market companies with annual revenue of $10 million and $1 billion are now private. These companies account for approximately one-third of private sector GDP and employment, and they are growing at a faster pace than the S&P 500.

To capture the benefits of the growth of smaller companies, younger investors are turning to the private markets – and to active management. Not only is active management essential for investing in the private markets, but the greater dispersion of returns in the private markets means that active management has more opportunity to add value.

In short, Bell concludes, “the private markets are where the public markets were 30 years ago,” so it’s no surprise that younger investors are tilting their portfolios toward this up and coming asset class.