Asset allocations of 40 per cent or more can make a substantial difference to portfolios of family offices and other institutions over the long term, the organization said.

A study of private assets (equity, credit, real estate and other areas) finds that top-ten performing investors such as family offices had a median - aka mid-point - asset allocation of 40 per cent or more in these areas.

Institutions that had a 20-year average allocation of 15 per cent or greater to private investments, produced a median annualized return of 8.1 per cent. This was 160 basis points higher than peers with less than 5 per cent allocation in private investments, the report by Cambridge Associates, said.

The organization went on to note that the average investor who allocated more than 40 per cent fared even better than that 8.1 per cent result.

Such reports come at a time when the merits of private assets have been heavily touted in recent years, so much so that there have been worries about a build-up of "dry powder" - uncommitted capital - that is looking for an attractive destination. While yields on listed stocks and conventional bonds have been hammered by a decade of ultra-low/negative interest rates, investors have gone into less liquid and, in some ways, riskier areas to hunt returns. 

There are some skeptics about the private asset class trend, but with some caveats. For example, Pictet Asset Management, the Switzerland-based group, recently told journalists that it was wary of private equity, which it regards as a very cyclical asset class, and was unhappy about the valuations of the existing PE market.

Over two decades ago, the idea that the illiquidity of private assets was worth the pain was boosted by the endowment fund of Yale University (hence the term "Yale model"). The notion initially took hold among large pension funds in the US and Western Europe, but the idea has spread to family offices, private clients and other financial players.

Alignment
“Multi-generational families of significant wealth are often well-aligned for considerable private investment allocations,” Maureen Austin, managing director in the private client practice at Cambridge Associates and co-author of the report, said. “The precise balance between the need for wealth accumulation for future generations and typically minimal liquidity requirements puts these investors in a unique position where a well-executed private investment allocation can significantly support and extend their legacy. Higher returns, compounded over time in a more tax-advantaged manner, make a sizable allocation to private investments quite compelling.”

Andrea Auerbach, head of global private investments at Cambridge Associates, added: “The very nature of private investing results in an average dispersion of returns of 16.5 per cent between the median and the 5th percentile, which will be captured by the investor who is informed, prepared, and able to manage the illiquidity these strategies require to generate the target returns.”