Surviving a Volatile Market with Private Equity

When significant real-world events wreak havoc on businesses, individuals, and financial markets, anything to provide stability to an investment portfolio is highly sought after. Could private equity funds provide the portfolio stability you’re looking for?

Market Volatility and Investor Behavior 

When there is significant volatility across markets, these periods of volatility generally become known as some type of economic event. Examples include the 1930’s Great Depression, Black Monday and the 1987 stock market crash, the Housing Market crash of 2008, and of course, the COVID-19 market sell-off of 2020. 

While the causes of these events vary, investor sentiment and behavior are typically influenced by fear and uncertainty.  When companies’ profitability and growth potential come into question, those that have publicly traded stock can experience dramatic price decreases due to investor behavior — without being driven by fundamentals. As sell-offs occur in public markets, a negative flywheel of fear, selling, and uncertainty feed into each other and have the potential to create more volatility.

The Role of Investor Sentiment and Behavior 

As previously described, investor sentiment is fickle. As news cycles spread fear, uncertainty and doubt, herd mentality quickly takes hold, further influencing market instability.

On top of herd mentality, recency bias can come into play. Volatility in the short-term reduces investor’s ability to keep their long-term investment goal in mind, potentially leading to loss aversion — investors selling their positions in a panic, attempting to limit their losses as prices fall. Understandably, during these periods, it can be difficult to maintain a  long-term investment perspective. 

While it’s difficult to predict what will cause market movements, it’s safe to say that investor psychology impacts public markets daily. The liquid nature of public stocks and bonds makes it easy to buy and sell at the drop of a hat (or the drop of bad news!). With the growing trend of passive investing, investors portfolios’ are increasingly exposed to irrational investor behavior during volatile market periods and systemic risks. 

While private equity investments are also prone to systemic risk, the inherent illiquidity means that it is not as susceptible to daily changes in investor sentiment. While the debate of whether or not private equity is less volatile continues, the lack of daily liquidity potentially protects against human emotions. It can create a smoothing effect when part of a diversified portfolio. 

Public and Private Equity — a Dynamic Duo

When considering a long-term asset allocation strategy, including public and private equity can be complimentary — providing diversified asset class and strategy exposure, different liquidity profiles, and potentially uncorrelated returns, to help achieve portfolio return objectives.

As a trade-off for liquidity, private equity has historically provided investors with the opportunity to generate higher returns in comparison to public investments, as well as growing cash flow. Ironically, despite the early illiquidity, the cash flows provided via distributions grow at an increasing rate as the fund matures, providing liquidity to be allocated elsewhere in the portfolio.  

Furthermore, private equity provides exposure to assets and strategies that aren’t available in public markets. Active selection of these investment opportunities can be an additional source of alpha within a portfolio.

On the other hand, the liquidity that comes with public equities allows investors to strategically and tactically maneuver their allocations when short-term opportunities arise. 


When comparing private and public equity, one option is not necessarily better than the other. Rather, they can work together to create an optimal long-term investment strategy. Incorporating private equity into a portfolio helps to potentially minimize losses during a bear market, provide return diversification and stabilization, and provides a unique opportunity to achieve alpha. 

Disclosure: ​​Evolution Private Investment Collective, LLC (the “EPIC”) expresses views in this article from an impartial perspective as related to the subject matter discussed therein. These views are current as of the article’s publication date and do not constitute investment advice or a recommendation to transact or invest in any particular product, sector, or manner. It should not be assumed that investing in the way described herein has been or will be profitable. These views are not intended to forecast future events or guarantee future results. Investors should confer with their financial planner, accountant, and/or legal counsel before making any investments. All investments involve risk, including a loss of principal.

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