Diversification in private markets is no longer simply about the number of managers, funds or underlying companies in a portfolio. Ahead of SuperReturn Europe, Ellen van den Broek, Portfolio Manager, Private Markets at LGPS Central, considers how secondaries, listed private equity and the composition of investment teams could broaden the way LPs assess diversification.

Diversification is one of the oldest principles in investing, but what constitutes genuine diversification continues to evolve.

For institutional investors in private markets, it increasingly means looking beyond the number of managers, funds or underlying companies in a portfolio. Vintage, strategy, liquidity and the people making investment decisions can all form part of the picture, alongside the continuous management of exposures.

How has the current market changed the way you think about diversification?

For large institutional investors, diversification has to be deliberate.

As the market has grown and specialists have developed across sectors and strategies, LPs have gained more choice when building their portfolios and are less dependent on generalist funds.

That also means LPs need to remain closely engaged beyond the initial manager-selection process. They must assess where the most attractive return opportunities may emerge while leaving enough flexibility to respond as conditions change. Admittedly, nobody has a crystal ball.

Where do secondaries fit into that?

I think secondaries have become an increasingly important part of the toolkit.

Alongside their return potential in their own right, they can allow an LP to introduce vintage and manager diversification more quickly than would be possible by relying solely on new primary commitments. This can be particularly valuable when a client is underallocated to private equity.

The growing breadth of the market means investors can build portfolios combining specialists in particular substrategies with more diversified players. Those diversified managers can, for example, adjust the weighting between LP-led and GP-led transactions as the market moves, rather than requiring the institutional LP to continually adapt its own allocations.

As portfolios mature, secondaries can also become a portfolio-management tool. They may help investors reshape exposures, prevent overdiversification or pursue opportunities to improve returns.

As portfolios mature, secondaries can also become a portfolio-management tool.
Ellen van den Broek, Portfolio Manager, Private Markets, LGPS Central

Very large institutions with established primary and co-investment relationships could even consider developing this capability in-house, given the strong links between these activities.

Many already invest directly in GP-led transactions from time to time, even where they are not making a rollover decision, because of the clear synergies with co-investing.

Has that changed the role of other forms of diversification?

Listed private equity may be worth reassessing as part of the diversification toolkit, particularly for institutional investors.

Persistent discounts to NAV are a feature across much of the listed private equity market. Beyond that, my observations are based on limited research and comparison rather than a definitive conclusion.

Some listed vehicles appear to have underperformed closed-end vehicles managed by the same firm. Public-market sensitivity, particularly during downturns when LPs may want to take advantage of liquidity, lower trading liquidity compared with broader public markets and the size of institutional holdings can all affect the price available when an investor wants to exit.

Listed private equity can still provide accessibility. However, with the development of the secondaries market now offering another potential route to liquidity, could a closed-end vehicle combined with a secondary-market option ultimately work better?

More broadly, developments including continuation votes, managed wind-downs and strategic reviews at some listed funds suggest that investors are reconsidering the role these vehicles play.

These are personal reflections on an evolving market rather than a firm institutional view, and they would benefit from more systematic research.

Is there another form of diversification investors sometimes overlook?

One form of diversification that can be harder to achieve is diversity within the investment teams in which LPs invest.

There is research suggesting that the composition of decision-making teams can be associated with investment outcomes. For example, HEC research has found that, at deal level, gender-balanced teams, with women represented on the investment committee, outperformed all-male teams on both IRR and loss ratios.

That should not be interpreted as meaning that any single characteristic determines future performance. But it does raise an interesting question for LPs: do the traditional ways in which they assess GP teams, particularly during the initial stages of due diligence, capture everything that contributes to effective investment decision-making? Could LPs’ initial questioning itself influence how GPs build their teams?

LP due diligence quite rightly places considerable emphasis on track record, attribution, team stability and how long senior investors have worked together. Those factors matter, but perhaps they can sit alongside a broader set of questions.

Where does new thinking enter the organisation? How does a GP incorporate people with different professional experiences? How robustly are investment assumptions challenged? Does succession simply preserve an existing investment culture, or does it introduce complementary perspectives?

Perhaps we should also be asking whether the organisations making those investments are bringing sufficiently varied perspectives to the decisions they make
Ellen van den Broek, Portfolio Manager, Private Markets, LGPS Central

Why might diversity of experience become more important?

The labour market has changed. Careers are increasingly unlikely to follow a single linear path, and people can bring useful experience from different firms, industries and functions.

As technology, including AI, changes the way investment firms operate, the ability to bring original thought to a problem may become more, not less, important.

That also raises interesting questions about recruitment. Firms understandably invest heavily in developing talent internally, but there is value in bringing in people with experience of different organisations, industries, functions and ways of thinking.

One example is the decline in hiring from leading European MBA programmes in favour of developing talent entirely in-house. Although internal training has clear benefits, relying on it exclusively may overlook the value of working in highly diverse teams, as well as the insights and networks that people can gain from that experience.

For me, this is where the diversification debate becomes particularly interesting.

We spend considerable time analysing diversification within portfolios. Perhaps we should also ask whether the organisations making those investments are bringing sufficiently varied perspectives to the decisions they make.

Traditional measures such as track record, attribution and team stability will remain important. But in a changing private markets environment, where some question the persistence of private equity returns, LPs may also want to think deliberately about adaptability, breadth of experience and diversity of thought.

Ultimately, genuine diversification may be as much about how investment decisions are made as what appears in the portfolio.
Ellen van den Broek, Portfolio Manager, Private Markets, LGPS Central

Ellen van den Broek is Portfolio Manager, Private Markets at LGPS Central. The views and reflections expressed in this article are Ellen’s own and draw on her broader experience of private markets over several years; they do not necessarily represent the views of LGPS Central.