Why Sophisticated Investors Look Beyond Public Markets

Public markets are not going away. Nor should they. Stocks, bonds, ETFs, and other publicly traded securities remain some of the most efficient ways to build wealth, maintain liquidity, and access businesses around the world.

But I think there is a different question sophisticated investors should be asking:

Is the public market the entire investment universe — or simply the most visible part of it?

Increasingly, the answer is the latter.

The investable universe has changed

In the mid-1990s, the United States had more than 8,000 listed domestic companies. World Bank data, sourced from the World Federation of Exchanges, shows that number at approximately 3,900 in 2025.

That statistic needs context.

It does not mean public markets have become insignificant. In fact, an SEC analysis found that while the number of U.S. public companies had declined sharply from its late-1990s peak, the decline in the corporate assets represented by public companies was far smaller. In other words, public markets became increasingly concentrated in fewer, larger companies.

At the same time, a substantial amount of capital formation and investing now occurs outside public exchanges.

SEC Form PF statistics reported 58,891 private funds and approximately $19 trillion in net assets at the end of 2025 among the private funds captured by that reporting system. The data covers SEC-registered advisers meeting applicable private-fund asset thresholds, so it is not a count of every private investment in America — but it gives a sense of the scale of the market.

Private equity, private credit, privately held operating businesses, private real estate, infrastructure and other strategies have become meaningful components of modern capital markets.

And that changes how I think about diversification.

Diversification is about economic exposure, not simply the number of holdings

Owning ten public-market funds does not necessarily mean an investor has ten different economic exposures. They may still be heavily influenced by the same interest rates, public-market valuations, large-cap companies or investor sentiment.

Private investments can sometimes introduce very different return drivers.

• A private credit investment might depend primarily on contractual interest payments and the borrower's ability to repay.
• A real estate investment might depend on rental income, occupancy, operating expenses and property values.
• A private operating company might create value by growing revenue, improving margins, acquiring competitors or paying down debt.

These investments can behave differently because the economic engine underneath them is different. That does not automatically make them better. It simply makes them different — and different can be useful in a portfolio when the investor understands what they actually own.

The trade-off is access for complexity

There is a reason private investments require more work.

Public companies generally provide standardized financial reporting. Their securities have observable prices. An investor can typically buy or sell within seconds. Private investments are different.

The SEC specifically warns investors that private placements can involve limited disclosure, substantial risk of loss and significant restrictions on liquidity. An investor may have difficulty selling a private security and, in some cases, may need to hold it indefinitely.

So the decision to move beyond public markets should never be: “Private investments have higher returns, so I should own them.” That is far too simplistic. The better questions are:

• What is the underlying asset?
• Where is the return expected to come from?
• What could cause the investment to lose money?
• How much leverage is involved?
• Who controls the asset?
• What is the track record of the operator or manager?
• What information will I receive after investing?
• How long is my capital realistically committed?
• How does this investment fit with everything else I own?

Those questions matter much more than whether an investment happens to be public or private.

Private markets are not a replacement for public markets

I don't view this as an either-or conversation.

The strongest portfolios are often built by understanding what each part of the capital markets is designed to accomplish. Public markets provide extraordinary liquidity, transparency and access. Private markets can provide access to assets, companies, credit structures and investment strategies that may not exist in the listed universe.

The opportunity is not simply to “go alternative.” It is to expand the investment universe while becoming more disciplined about what deserves a place in it.

Sophisticated investing is not about owning more complicated things. It is about understanding more clearly what you own, why you own it, what could go wrong — and what economic engine ultimately has to produce your return.