Memo 8: Venture Capital, Private Credit, and the Lifecycle of Capital

Editor’s note:

This memo is the second in a three-part Harvesting Alpha series on capital allocation.

The first explored why early-stage technology investing so often disappoints when incentives, time horizons and risk are misunderstood. This piece steps back further, asking a more fundamental question: where do different private assets actually belong across a lifetime of capital accumulation and preservation?

The final memo will examine what happens when portfolios appear sophisticated on paper, yet fail quietly in practice.

A theory everyone learns and almost no one follows

Every finance graduate is taught the benefits of diversification. Every financial planner is trained to consider a familiar checklist before advising clients: stage of life, income needs, risk tolerance, time horizon, and liquidity requirements. In theory, capital allocation should be straightforward.

In today’s markets, with a dizzying array of financial products, asset classes, and global opportunities, it should be simpler than ever. And yet, in practice, it rarely is.

Part of the reason is behavioural. The foundational models of finance assume rational actors optimising expected returns. Real investors do not behave this way. Downside risk is felt more acutely than upside reward. Losses loom larger than gains. Decisions are shaped by familiarity and fear of loss as much as by the expected return.

This is not a flaw in investors. It is human nature, and it has been well documented in behavioural finance for decades.

Another reason is structural. While most sophisticated portfolios now should include some allocation to alternative assets, access remains uneven. Markets are less transparent. Products are often illiquid. Many financial advisers are constrained by availability and access to opportunities, regulatory settings, or institutional preferences can skew recommendations. Assets that matter in theory are frequently “off the table” in practice.

The result is a gap between what diversification theory prescribes and how portfolios are actually constructed.

This memo is an attempt to bridge that gap, not with product recommendations, but with a way of thinking. A framework grounded in theory and constrained by real-world behaviour.

Alternative Assets as a Class.

High-net-worth investors and family offices increasingly allocate beyond traditional assets. Alongside shares, property and bonds, portfolios now often include some exposure to venture capital, private equity and private credit, either directly or via fund structures.

This evolution is sensible. But it introduces a subtle mistake: treating “alternative assets” as a single category. They are not.

Each alternative asset class expresses risk differently. Each requires different time horizons. Each fails in different ways. And each belongs in a portfolio for a different reason.

Venture capital: convexity, not consistency

Venture capital is defined by outcome concentration. A small number of investments generate the majority of returns, while most deliver modest or negative outcomes. Empirical research consistently shows that venture returns follow a power-law distribution rather than a normal one.

For investors in their thirties and forties, modest venture exposure may align with long-term wealth creation. For those approaching or in retirement, the same exposure introduces sequencing and liquidity risk that is often underappreciated.

Venture capital is not a yield asset. It is not a liquidity asset. It is an option-like exposure to upside, and it should be sized accordingly.

Private equity: leverage, timing, and maturity

Private equity occupies a different place in the capital lifecycle.

As an asset class, private equity has matured. Competition for high-quality businesses is intense. Entry valuations are fuller, and excess returns increasingly depend on leverage, operational execution and exit timing rather than obvious mispricing.

In recent years this maturity has collided with a challenging market environment. Exit activity, the primary mechanism through which private equity funds realise value and return capital to investors, has slowed markedly.

In 2024, the value of global private equity exits fell to a five-year low of about USD $392 billion, down significantly from prior peaks, and exit activity in the first quarter of 2025 hit its lowest levels in two years as buyers and sellers failed to agree on pricing. Average holding periods have extended, and distributions of capital back to limited partners have been dampened by this exit drought and valuation mismatch.

These dynamics are not an indictment of underlying portfolio companies, which may remain fundamentally sound. They are, instead, an indicator of how liquidity timing and the failure of traditional exit pathways has become a central constraint for funds and their investors. You can invest, and get good returns, but when will you get your money back?

Private equity returns are episodic: value is realised at exit. When exit markets weaken, assets may remain sound, but capital remains trapped. This makes liquidity assumptions critical, particularly for investors whose broader portfolios already rely on growth assets and favourable market conditions.

Private credit: income, duration, and behaviour under stress

Private credit serves a fundamentally different role.

Where venture capital depends on rare outcomes, and private equity depends on exit timing, private credit depends on underwriting and contractual cash flow.

Returns are driven by income, amortisation and principal repayment. Value is realised through time, not at a single exit event.

This introduces duration control. Even where loans are illiquid in a trading sense, they are liquidity-generating over time.

For portfolios dominated by appreciation-dependent assets, this behaviour matters. It does not eliminate risk, but it materially reduces the probability that all assets fail in the same way at the same time.

Why small allocations matter more than large ones

Institutional research suggests that alternative assets do not need to dominate portfolios to be effective.

Across endowments, pensions and family offices, alternatives often comprise 10–30% of total assets, with venture capital typically 5% or less, private equity 10–20%, and private credit often 5–15%, depending on objectives.

The benefit of alternatives arises not from maximising exposure, but from modifying portfolio behaviour. Small, disciplined allocations can reduce volatility, improve downside resilience, and mitigate timing risk.

The lifecycle lens

Seen through a lifecycle lens, the roles become clearer.

Venture capital belongs early, when time is abundant and losses are survivable. Private equity fits mid-cycle portfolios with stable liquidity elsewhere. Private credit becomes more valuable as capital preservation, income, flexibility and liquidity rise in importance.

Problems arise not from selection, but from mis-timing.

Closing reflections

Alternatives assets are tools, not solutions.

Used thoughtfully, they can improve portfolio resilience. Used indiscriminately, they can concentrate risk in subtle ways.

Capital allocation is not about maximising theoretical returns. It is about ensuring capital behaves as expected across cycles, regimes and personal circumstances.

Selected References:

1. Kahneman, D. & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica.

2. Barberis, N. & Thaler, R. (2003). A Survey of Behavioral Finance. Handbook of the Economics of Finance.

3. Harris, R., Jenkinson, T. & Kaplan, S. (2014). Private Equity Performance: What Do We Know? Journal of Finance.

4. Swensen, D. (2009). Pioneering Portfolio Management.

5. Geltner, D. et al. (2018). Commercial Real Estate Analysis and Investments.

6. S&P Global: Private equity exit value falls to a five-year low in 2024 (exit values ~$392 billion, weak exit market). 

7. S&P Global: Private equity exits fall to two-year low in Q1 2025 (exit count and value depressed as buyers/sellers diverge). 

8. Preqin / LP liquidity stress: slow distributions, elongated holding periods, and capital still unrealised well beyond typical timelines.