PRIVATE EQUITY PORTFOLIO CONSTRUCTION

Objective

Every portfolio is an attempt to solve the same problem: how to compound capital over long periods without taking risks that only become obvious in hindsight. The work is less about finding a single great idea and more about building a system that can live through multiple market environments.

An effective private equity portfolio balances risk, return, and liquidity in support of long-term objectives and alignment with each client’s strategic asset allocation. Because private equity operates in less liquid and less efficient markets, capturing incremental return premia requires more than access; it requires structure, patience, and disciplined implementation.

This document outlines a framework for private equity portfolio construction, emphasizing pacing, sizing, manager selection, and risk management, where implementation choices materially shape long-term outcomes.

Key Principles

• Diversification across time and structure - Returns are cyclical, often in ways that only look obvious after the fact. Rather than attempting to time markets, portfolios should diversify exposure across vintage years, strategies, and economic environments.
• Consistency over precision - Long-term outcomes are shaped more by steady implementation than by tactical accuracy. Consistent pacing and sizing matter more than getting any single decision exactly right.
• Annual monitoring - Pacing plans and target weights should be reviewed at least annually to ensure alignment with long-term objectives and current portfolio conditions.
• Manager selection matters - Dispersion is real. In segments like private markets, selecting high-quality managers is often a decisive driver of results.
• Balance risk and liquidity - Strategy mix should reflect differences in duration, cash-flow patterns, and volatility so that return-seeking allocations do not overwhelm overall liquidity or risk tolerance.

Pacing and Sizing

Any portfolio that includes less liquid strategies must manage pacing and commitment sizing prudently to achieve and maintain its target allocation within the broader strategic asset allocation. Pacing models can be used to project future cash flows and net asset value (NAV) growth, incorporating assumptions around portfolio maturity and target weights.

Each client’s situation is different; however, for portfolios targeting a 10-15% allocation to private equity, a commitment pace of approximately 1.5-2.5% of NAV per year is typical.

Given common implementation constraints, clients can often make at most four private commitments per year. To support diversification while remaining manageable, we generally recommend three to four commitments annually, typically 0.5%-1.0% of NAV each, depending on fundraising cadence and conviction.

Strategies

Private equity portfolios are typically built through commitments to illiquid strategies with ten- to twelve-year fund terms. The right mix depends on the role private equity plays within the total portfolio, but the strategies below capture the tradeoffs that matter most.

Buyout

Buyout strategies typically invest in cash-flow-positive businesses and often use leverage to facilitate acquisitions. As control investors, buyout managers tend to be more operationally involved than most other private strategies, which can improve the range of potential outcomes. Historically, buyout has offered attractive risk-adjusted returns and more predictable cash flows than earlier-stage strategies.

Because of its moderate duration, attractive median outcomes, and comparatively lower volatility, buyout is often the anchor of a private equity allocation. We recommend allocating 40-60% of the private equity portfolio to buyout strategies.

Venture Capital

Venture capital is characterized by minority investments in early-stage businesses that are not yet near profitability. A defining feature of venture portfolios is that a small number of investments often drive a large share of total value. This dynamic increases dispersion: outcomes can be exceptional, but patience is required and liquidity is typically delayed.

Venture capital is also long duration. Because venture-backed companies are earlier in their lifecycle, meaningful distributions often arrive later in the fund’s life. That said, due to its return potential, venture can play an important role in private portfolio construction when sized appropriately. We recommend a 20-30% allocation to venture capital strategies.

Growth Equity

Growth equity sits between buyout and venture on the private equity spectrum. It often targets companies with significant revenue and high growth rates. Managers are typically minority investors, with less operational control than buyout managers, and strategy definitions can overlap with late-stage venture or minority-focused buyout.

The risk/return/duration profile is generally between buyout and venture, making growth equity a useful complement within private portfolios. We recommend a 10-20% allocation to growth equity strategies.

Secondaries

Secondaries strategies purchase interests in private funds and/or companies on the secondary market, often at discounts. Because underlying assets are typically more mature, these strategies tend to have shorter duration and can help manage early portfolio cash-flow dynamics.

Secondaries can mitigate the j-curve in new portfolios and serve as a cash-flow diversifier for mature portfolios. We recommend a 5-10% allocation to secondaries for mature portfolios (and a higher allocation for portfolios in the building phase, as discussed below).

Other Private Market Strategies

Private credit, private real estate, and private natural resources can be important components of a broader portfolio. However, their inclusion within the private equity sleeve should generally be reserved for strategies expected to improve overall risk-adjusted outcomes, rather than primarily provide income or diversification.

• Private credit tends to be shorter duration and cash-flow positive, but expected returns may or may not be additive to the portfolio’s return objective depending on structure and pricing.
• Private real estate is often cash-flow positive at entry, with managers focused on enhancing future cash generation, but its role is frequently better defined at the strategic allocation level.
• Private natural resources can diversify and hedge inflation in certain regimes, but its expected returns are often driven by commodity-linked exposures and may fit better as a strategic allocation decision.

Established vs. Non-Established Managers

A core/satellite approach is often effective. Core exposures are typically accessed through established managers where the risk/return tradeoff is viewed favorably and with greater confidence than it would be for newer firms. Confidence can stem from track record, organizational depth, portfolio construction, and the diversification the manager provides.

Non-established managers are often on their first few funds, when the firm’s track record is still being built. Over time, these managers may earn larger roles as conviction increases.

We also view select fund-of-funds and multi-manager vehicles as potentially additive. While they introduce an additional fee layer, strong platforms can provide diversification, access, and risk management benefits that improve portfolio balance.

As a practical guide, we recommend two to four commitments to core managers over a rolling two-year period, sized toward the higher end of the commitment range, and four to five commitments to non-core strategies, sized toward the lower end.

Mature vs. Building

A mature private portfolio is one where the actual allocation is at or above target and is largely self-funding through distributions. For portfolios starting from scratch, reaching maturity can take eight to ten years, depending on pacing and strategy mix.

For portfolios building toward a target allocation, we recommend:

• Increasing commitments to j-curve-mitigating strategies such as secondaries.
• Limiting commitments to the longest-duration strategies, such as venture capital.

This approach allows the portfolio to move toward its target allocation while avoiding heavy exposure to long-duration funds that typically do not distribute meaningful capital until later in the fund life.

Mature portfolios can tilt commitments toward longer-duration strategies with higher expected returns because cash flows are typically more predictable. Exits can be lumpy, particularly in venture, so we continue to recommend that mature portfolios include at least one secondary strategy every other year to help smooth distributions.

Strategic vs. Tactical

Our firmest conviction is that successful private portfolios maintain a steady commitment pace across market environments. In practice, this discipline is hardest to maintain when it matters most.

When public markets fall, investors can experience the “denominator effect”: total portfolio value declines while private valuations adjust more slowly, making the private allocation appear to rise. During such periods, continuing to commit can be challenging because the private equity allocation temporarily exceeds its target weight. When public markets are strong, the reverse can occur, and investors may feel pressure to accelerate commitments.

Deviating from steady pacing can create long-term distortions, missing attractive vintages or concentrating exposure in frothier ones.

To mitigate these challenges, we recommend:

• Using wider allocation ranges rather than point targets.
• Calculating commitments using a rolling three-year NAV (net of cash flows).
• Allowing flexibility over an 18-month commitment window rather than forcing decisions into a rigid annual calendar.

Managers and Strategies

Given the strategy mix and commitment guidance above, the table below provides an illustrative view of the number of commitments and manager relationships typically required to build and maintain a diversified private equity allocation.

Geographic Exposure

Geographic exposure within a private equity portfolio is best determined at the strategic asset allocation level. Should exposure to a particular market be desired, an assessment should be made as to whether that exposure is best achieved through public markets, private markets, or a combination of both.

As a default, portfolios may be heavily allocated to North America due to market depth, proximity, and the long track record of successful private investing in the region. Opportunities outside North America can be considered on a bottom-up basis, particularly where manager capability and market structure support the case.

Sector Specialists vs. Generalists

We are agnostic between sector specialists and generalists. In some sectors, such as healthcare, specialization can be advantageous and the market opportunity is large enough to support focused strategies. As opportunities narrow, the case for specialization often increases because execution and domain knowledge become more important. Venture capital often skews toward technology, where rapid change can favor generalists with adaptable frameworks. In areas like biotech, specialization can be beneficial.

Summary

Constructing an optimal portfolio is less about making bold calls and more about making a series of reasonable decisions and maintaining discipline when markets test it. A structured framework focused on diversification, pacing, and alignment with long-term objectives helps investors navigate complexity without becoming hostage to it. Combined with thoughtful manager selection and consistent implementation, this approach helps support durable outcomes over long horizons.