The Liquidity Myth: Why the Future of Investing is Private

The market has been on a sugar high. Stocks hovered in and around record levels for months. Bonds, once the reliable ballast to portfolios, became unpredictable, in not painful to own as a diversifier, defying the simple math that underpinned decades of investment wisdom, until... a little over a month ago. The so-called "60/40" portfolio—long considered the gold standard for wealth preservation—is being exposed for what it truly is: a relic of an era when easy money covered up its fundamental flaws. The moment of reckoning isn't looming—it has already arrived.

The time has come for private markets, once the underutilized powerhouse of wealth creation that institutions have leveraged for decades while retail investors remain on the outside looking in. Why? Misconceptions, fear of illiquidity, and a lack of access. But that’s changing. And if you’re not paying attention, you risk missing one of the most important shifts in portfolio construction in a generation.

This was the central theme of a revealing conversation with Franklin Templeton Institute’s Senior Alternatives Investment Strategist, Tony Davidow.¹ Our discussion peeled back the layers of private markets, exposing both the challenges and opportunities they present.

A Wake-Up Call for Traditional Investors

“The easy money was made,” Davidow stated bluntly. The roaring bull market of the past 40 years lulled investors into believing in a simple formula: stocks for growth, bonds for stability. But as 2022 demonstrated, that stability is an illusion. “Everyone was surprised when both stocks and bonds were down double digits. And I think it served as a little bit of a wake-up call for advisors who got comfortable with that standard 60/40 portfolio.”

Davidow is not alone in sounding the alarm. Over the past few decades, institutions, family offices, and elite investors have quietly pivoted toward private assets—private equity, private credit, and private real estate—while everyday investors remained tethered to public markets. Now, new investment vehicles are breaking down the barriers, allowing a broader class of investors to access these previously exclusive strategies.

“This is a relatively new phenomenon,” Davidow explains. “The first generation of private market products was limited to qualified purchasers with $5 million or more in investable assets. So it’s not surprising that institutions and family offices were the primary users.” That’s no longer the case. Product innovation, coupled with the harsh realities of public market volatility, has sparked an evolution in portfolio construction.

Illiquidity: A Feature, Not a Bug

There’s no getting around it: private investments are illiquid. But Davidow argues this is not a drawback—it’s an advantage. “Institutions and endowments have long understood the benefits of patient capital. The question is, how do we get individual investors comfortable with the idea?”

One of the most persistent criticisms of private markets is that their valuations are not marked-to-market daily, leading some skeptics—Cliff Asness among them—to label them a form of "volatility laundering." Davidow rejects this framing. “We need to move past the idea that daily liquidity is inherently good. Liquidity is only valuable if you need it. If you don’t, it often leads to reactionary decisions that hurt long-term returns.”

He points to the Yale endowment model, where allocations to private assets have consistently outperformed their public market counterparts. “Yale famously used a 70–80% allocation to alternatives to achieve outsized returns over the long run,” Davidow notes. “And they did so because they understood that illiquidity premium—the additional return investors earn for locking up their capital—was worth it.”

The Shrinking Public Market and the Rise of Private Equity

The numbers paint a stark picture. The public markets are not what they once were.

“Twenty years ago, there were 8,000 public companies in the U.S. Today, there are roughly 4,000,” Davidow explains. “Meanwhile, the private market has exploded. Nearly 87% of companies with $100 million or more in revenue are private.”

For investors stuck in public equities alone, this means exposure to only a fraction of the economy’s most lucrative opportunities. “Private equity is not about replacing public stocks,” Davidow clarifies. “It’s about expanding the opportunity set. It’s a way to access companies that aren’t constrained by the quarterly earnings cycle, that can make strategic investments with a long-term focus.”

Yet, many investors hesitate, citing concerns about complexity. “This is where advisors need to step up,” Davidow urges. “They need to not only understand these products but also be able to communicate their benefits effectively to clients. The biggest mistake would be to try to sell private assets with a slick pitch, only for investors to later realize they didn’t fully understand what they were getting into.”

Secondaries and the Future of Private Markets

Private markets aren’t just about private equity. Davidow points to secondaries—an increasingly important sector where investors buy stakes in existing private equity funds at a discount. “Secondaries have grown from a niche strategy to a vital part of the private equity ecosystem,” he noted. “They offer built-in diversification, a shorter J-curve, and access to seasoned assets at favorable pricing.”

Real estate is another area where Davidow sees opportunity. While office properties are struggling, segments like industrials, multifamily housing, and life sciences real estate remain attractive. “Valuations have come down, but if you can be selective, there’s real value to be found.”

The Democratization of Alternatives

What does all of this mean for financial advisors and their clients? Quite simply, the rules of portfolio construction are changing, and those who fail to adapt will be left behind.

“We’re no longer at the stage where advisors are asking ‘why?’” Davidow observes. “The conversation has shifted to ‘how?’” The path forward, he says, is education. Advisors must understand not just the products, but the role they play in achieving client goals.

For those who embrace private markets, the rewards are clear. “The largest and most sophisticated investors in the world have already made their move,” Davidow concludes. “The question is, when will everyone else catch up?”

Final Thought: Adapt or Be Left Behind

As public markets continue their unpredictable trajectory and the shortcomings of the 60/40 model become increasingly evident, private markets represent a compelling alternative. But this is not a decision to be made lightly. Understanding the trade-offs—illiquidity, complexity, and manager selection—is critical.

Investors who are willing to rethink traditional portfolio structures, however, stand to gain. “The market environment is demanding a more robust and reliable toolbox,” Davidow asserts. “And private markets are the key to building better portfolios for the future.”

The doors to private markets are opening. The only question that remains: will you walk through them?

Footnote:

¹ "Rethinking Wealth: Unlocking the Power of Private Markets with Tony Davidow." AdvisorAnalyst, 18 Mar. 2025, advisoranalyst.com/2024/12/10/rethinking-wealth-unlocking-the-power-of-private-markets-with-tony-davidow.html.

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