By Justin May, Portfolio Manager

I have an investment idea for you: it’s a replacement for the boring bond fund in your retirement account. Your bond fund has only returned 4%; mine has returned nearly 10% with less than half the risk.

As alternatives become increasingly democratized, more investors are pitched private investments using these types of numbers. According to a graph sent to me recently by one large manager, private equity, credit, and real estate have all outperformed stocks over the last 15 years, while displaying lower volatility than bonds. Blackstone (the largest private asset manager) says allocating 30% of your entire portfolio to alternatives will enhance return, reduce volatility, and increase yield, even after paying ~2% fees annually.

The benefits are true. Technically. Private markets have outperformed public markets historically. But think critically: are such spectacular returns achievable with so little risk? I’d argue no. The illusion of lower risk is explained mostly by differences in valuation methods.

Public investments (such as stocks and bonds) are priced based on the most recent trade. Prices adjust instantly and can swing wildly throughout the day as traders (over)react to new information, long before a company’s balance sheet or cash flows are affected. On the other hand, much of a private investment’s valuation is rooted in fundamentals rather than sentiment, meaning that private investment values are likely to change only when the company’s actual cash flows change, which happens much more gradually. The result is a much smoother ride, on paper, than is experienced in public markets. This smoothness is not a result of a less risky investment, but rather differences in valuation method. An investment in a private company has the same (if not more) risk than a public company, all else equal.

I’ll use a real-world example from private credit because it’s making headlines, though the same principle applies to private equity and real estate. Blackstone offers two very similar private credit funds: publicly-traded BXSL, and privately-traded BCRED. BXSL (as of 3/16/26) has returned -10.6% year to date, -16.7% over 1 year, and +9.3% annualized over 3 years. BCRED has returned a similar +10.5% over the past 3 years, but instead of deeply negative short-term returns, it’s returned +7.5% over 1 year.

The NAV (Net Asset Value) for public BXSL, which represents what the manager says the fund’s underlying investments are worth, helps explain the difference. BXSL’s NAV has risen steadily since its inception, while the price (the public’s valuation) has been anything but steady. Investors are currently skeptical of the stated value of BXSL, and are willing to sell it for much less than what Blackstone says it’s worth. The return of private BCRED is similar to the NAV growth of BXSL, with the added hurdle of illiquidity, meaning the valuation can never truly be tested.

Market Price v. NAV Growth, BXSL (via CEF Advisors)