Private Equity as an Equity Diversifier

The recent volatility and uncertainty in equity markets serve as powerful reminders of the importance of expanding portfolio diversification. Even before the current events, the traditional 60/40 portfolio had shown limitations—offering little diversification from equities, with global bonds exhibiting a striking 0.98 correlation to equities (see figure below).

Private equity can serve as an effective portfolio diversifier, a trait that is often underappreciated. As shown above, substituting global equities with private equity significantly reduces equity correlation to 0.75 from that 0.98 figure, while maintaining a similar diversification benefit to global bonds.

Why Private Equity Has Helped Diversification

Why does private equity enhance diversification? To begin, private equity managers have a broader set of techniques to influence outcomes and drive value creation—tactics that public equity managers typically do not have access to. Beyond these operational differences, however, private equity also offers fundamentally different exposure to companies and industries compared with public markets. First, by definition, private equity invests in a distinct universe of companies—those that are not included in public indexes. This means you’re accessing a different pool of opportunities, capital structures and growth profiles.

Second, the industry composition of the private equity universe differs meaningfully from that of public markets, offering a unique return stream. Industries tend to behave differently across market cycles, and private markets often emphasize sectors that are underrepresented in public benchmarks. For example, consumer discretionary companies accounted for the third-largest share of private equity deals over the past decade yet rank only fifth in global public equity indexes by sector weight. 

As a result, investing in private equity can provide differentiated sector exposure—enhancing portfolio diversification beyond what’s available in public markets (see below).

Building on the diversification benefits discussed earlier, private equity not only provides access to a different set of companies and industries but also has historically demonstrated comparatively resilient performance across various market environments.

As shown in the figure below, private equity has demonstrated its ability to act as a portfolio shock absorber. Across varying combinations of growth and inflation—whether high growth, low growth, high inflation, or low inflation—private equity helped moderate drawdowns and delivered more stable performance relative to public equities. For example, in the most challenging environment of low growth and high inflation, global equities experienced a sharp decline, while private equity showed a shallower drawdown, cushioning the blow for investors (see below).

This resilience stems from private equity’s long-term investment horizon, operational control, and less frequent mark-to-market pricing—all of which help insulate it from the short-term volatility that often defines public markets.

Summing Up

Taken together, private equity’s differentiated exposures, lower correlations, and ability to absorb shocks make it a compelling addition to a diversified portfolio—particularly in uncertain or volatile macro environments.

Read more in our Alts Quarterly Q2 2025.

A WORD ABOUT RISK
As an asset class, private credit comprises a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due to their typical opportunistic focus on companies with limited funding options, in comparison with their public equivalents.

Because private credit usually involves lending to below-investment-grade or non-rated issuers, yield on private credit assets is increased in return for taking on increased risk.

Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability and energy conservation policies.

Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or prediction of investment performance. Diversification does not guarantee a profit or protect against loss. Views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy. 

Opinions expressed herein are current opinions of Brookfield, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance, and the value of investments and the income derived from those investments can fluctuate.

FORWARD-LOOKING STATEMENTS
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The information provided herein reflects Brookfield’s perspectives and beliefs as of the date of this commentary. 

INDEX PROVIDER DISCLAIMER
The quoted indexes within this publication are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. There may be material factors relevant to any such comparison, such as differences in volatility and also regulatory and legal restrictions between the indexes shown and any investment in a Brookfield strategy, composite or fund. 

Brookfield obtained all index data from third-party index sponsors and believes the data to be accurate; however, Brookfield makes no representation regarding its accuracy. Indexes are unmanaged and cannot be purchased directly by investors. Brookfield does not own or participate in the construction or day-to-day management of the indexes referenced in this document. The index information provided is for your information only and does not imply or predict that a Brookfield product will achieve similar results. This information is subject to change without notice. The indexes referenced in this document do not reflect any fees, expenses, sales charges or taxes. It is not possible to invest directly in an index. The index sponsors permit use of their indexes and related data on an “as is” basis, make no warranties regarding the same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their index or any data included in, related to or derived therefrom, and assume no liability in connection with the use of the foregoing. The index sponsors have no liability for any direct, indirect, special, incidental, punitive, consequential or other damages (including loss of profits). The index sponsors do not sponsor, endorse or recommend Brookfield or any of its products or services. Unless otherwise noted, all indexes are total-return indexes.

INDEX DEFINITIONS
Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross-of-fee performance of U.S. middle-market corporate loans, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs), including both exchange-traded and unlisted BDCs, subject
to certain eligibility requirements.

EURO STOXX 50 Index, Europe’s leading blue-chip index for the eurozone, provides a blue-chip representation of super sector leaders in the region.

FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market capitalization- weighted total-return index that consists of publicly traded equity REITs and listed property companies from developed markets. 

FTSE Global Core Infrastructure 50/50 Index gives participants an industry-defined interpretation of infrastructure and adjusts the exposure to certain infrastructure subsectors. The constituent weights are adjusted as part of the semi-annual review according to three broad industry sectors: 50% Utilities; 30% Transportation, including capping of 7.5% for railroads/railways; and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization. 

ICE BofA U.S. High Yield Index tracks the performance of U.S.-dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. 

The ICE BofA Merrill Lynch Global High Yield European Issuers Non-Financial 3% Constrained Ex Russia Index is a sub-index that contains all securities in the broader index except those from financial issuers or with Russia as their country of risk but caps issuer exposure at 3%. The index is rebalanced monthly. The index is USD hedged. 

Morningstar LSTA U.S. Leveraged Loan Index is a market-value-weighted index designed to measure the performance of the U.S. leveraged loan market. 

MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. 

Nasdaq Index is a market-cap-weighted index tracking companies traded on the Nasdaq stock market. Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter. 

Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

Preqin Real Estate Index captures in an index the return earned by investors on average in their private real estate portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter. 

S&P 500 Index is a market-cap-weighted equity index of 500 widely held, large-capitalization U.S. companies.