A variety of factors drives the outperformance. First, there is a liquidity premium associated with private markets: Higher returns may be compensation for longer lockup periods with investors’ capital. 

Another reason could be that companies are staying private longer and, in turn, have the potential to experience more of their growth and innovation before going public. For instance, in the technology sector, the average age of a new public company has gone from 4.5 years in 1999 to more than 12 years in 2020.¹ As tangible examples, two of the 10 largest-ever tech IPOs waited 10 and 12 years, respectively, before going public, long after they had disrupted the industries in which they operate.

Private investments can also be a valuable diversifier. This is due to the much wider pool of companies within private markets. There are more than 18,000 U.S. private companies with annual revenues above $100 million, compared with just 2,800 public companies with those same revenue levels.

Over the last two decades, public markets have become increasingly more concentrated, dropping from more than 7,800 publicly listed companies at the beginning of 2000, to roughly 4,800 at the end of 2020.² The dwindling number of public companies has made diversification beyond them even more important.