A recent Morningstar report has cast doubt on one of private markets' key selling points: the promise of unique, differentiated exposure. The study, titled 'How Private Is Your Private Portfolio?', found that semiliquid private market funds—often marketed as offering exclusive access to proprietary deals—frequently hold many of the same underlying investments, blurring the line between private and public market diversification.
According to the analysis, overlap is particularly pronounced in private credit. More than one-third of assets in direct lending strategies are tied to companies held by at least five different funds. On average, private credit funds share roughly 20% of their borrowers with peers, indicating a meaningful degree of common exposure across the category. This similarity extends to broader portfolio comparisons, where semiliquid private portfolios differ from one another about as much as comparable public strategies, such as small-cap equity or bank-loan funds.
For advisors, these findings raise important questions about the value proposition of semiliquid funds, especially given their higher fee structures. When portfolios begin to look alike, cost becomes a primary driver of long-term outcomes. Many private equity strategies operate as fund-of-funds, allocating capital to the same underlying vehicles. Roughly a quarter of funds in the category hold stakes in the four most widely owned private equity funds, underscoring concentrated exposures.
Private credit markets show similar patterns. While loans are not syndicated as broadly as traditional bank loans, the average borrower appears in about 3.5 different direct lending portfolios, suggesting that fully unique deals are relatively uncommon. At least 15% of semiliquid direct lending assets are invested in companies that also appear in bank-loan funds, and those shared names make up a large portion of bank-loan portfolios on a dollar-weighted basis.
For advisors and investors, this raises a practical consideration: similar issuer exposure can often be accessed more cheaply through traditional mutual funds or ETFs. The report also flags concentration risks. Semiliquid funds tend to have heavier exposure to a handful of industries than public benchmarks, with the top five sectors accounting for about 55% of assets compared to just over 40% in the S&P 500. Technology, particularly software, stands out with roughly 27% of assets in the largest holdings tied to software companies, and broader definitions suggest the true exposure could approach one-third of portfolios.
Liquidity management adds another layer of complexity. Private equity semiliquid funds hold close to 15% of assets in cash on average, nearly double the level seen in private credit strategies, reflecting the need to balance redemptions with investment deployment. Loan maturities—typically four to five years—provide a natural source of liquidity, though the timing of repayments remains uncertain, particularly in stressed market conditions.
The findings come amid increased scrutiny of private markets. Regulators, including the SEC, have intensified their focus on the $2 trillion private credit market, as highlighted in recent coverage. Additionally, firms like Apollo and KKR are pushing for greater transparency and liquidity in retail private market products, as reported in this article. These developments underscore the need for advisors to critically evaluate the diversification and cost benefits of semiliquid funds.
