Sophisticated investors—HNW individuals, family offices and institutions—have long included allocations to private equity in their portfolios, usually with two objectives in mind.

The first is the potential for generating higher long-term returns by capturing the illiquidity premium associated with private investments. This premium is defined as the incremental return that investors hope to capture above a liquid, public market investment in return for locking up their capital for an extended period. Research my firm has conducted using a proprietary methodology shows that premium to have averaged 3.2% annually from 2007 through the first quarter of 2021 (please refer to the chart below).

The second objective is risk reduction by diversifying away from the public markets. Traditional private equity allocations, however—for example, to large buyouts or midmarket growth equity—overlook a much broader opportunity to pursue alpha and further enhance diversification through market cycles. Here is a summary of these alternative strategies:

International private equity recognizes that geography is an important form of diversification and that the private equity opportunity set is global. Developed markets outside of the U.S. encompass Western Europe, Japan, Israel and Australia/New Zealand, with Western Europe being the largest and, by itself, the most diverse. The region also offers a tremendous pool of potentially investable small and middle market companies. In all of these markets there is a body of proven private equity managers with track records of success. In addition, each has a developed banking system, adequate liquidity for financing, a sound rule of law and reliable regulatory standards. Investors may question the timeliness of commitments amid the lingering pandemic; data show that the eurozone economy contracted by 0.6% in the first quarter of 2021. But it’s important to bear in mind that private equity investing is a long-term strategy and that commitments are invested over multi-year periods. Moreover, academic studies have shown that there is little correlation between private equity returns and GDP growth and many private companies around the world are growing much faster than their respective economies.

Emerging markets private equity seeks to benefit from exposure to some of the world’s fastest growing markets. A key benefit here is access to compelling growth opportunities in countries whose public markets are often shallow and volatile. That said, the strong entrepreneurial culture redefining many emerging markets lends itself naturally to private equity. Key to investing in private emerging markets is access to managers with both a local presence and a global point of view. Key markets for investors in emerging markets private equity are China, India, Latin America, Central and Eastern Europe, and on a selective basis Africa and other Asian countries.

Secondaries involve purchasing existing interests in funds raised during prior vintage years and thus during different market cycles. Secondaries come about when an investor wishes to sell or exit all or a portion of their fund commitment prior to normal liquidation. This practice enables prospective buyers to acquire funds with greater visibility into underlying portfolio companies, sometimes at attractive discounts to their current NAV. Secondaries can also moderate the “J-curve” effect found in the early period of a fund’s life as the underlying assets are more mature and closer to realization. In recent years, secondaries have represented a market sized at about $60 billion—small compared to the domestic private equity market but growing rapidly and expected to surpass $100 billion for the first time this year. Opportunities may also be found in developed international and emerging markets.

Co-investments are a direct equity investment in a company by a limited partner (LP) alongside the general partner (GP). LPs typically engage in co-investments in situations where they believe they have a preferred relationship with the GP. The primary benefits for the LP are the opportunity to invest more capital with talented managers and to invest pari passu with the GP, often without paying management fees or a carried interest charge. The risk is that of greater concentration in one particular company; thus, co-investments require a different set of skills than general private equity investing on the part of LPs.

Real assets and sustainability cover an increasingly diverse set of investments across a range of subsectors. These can include traditional natural resource investments like oil- and natural gas-related companies and properties; mining and metals companies and assets; and energy infrastructure. Over the last decade, these investments have gradually expanded to include exposure to areas such as power and renewables, agriculture and water, and resource efficiency, all of which offer exposure to key secular growth trends. In addition to supporting the objectives of enhanced return and portfolio diversification, real assets and sustainability offer a hedge against inflation. There are a number of investment approaches in this area given the asset-intensive nature of some segments; among them are purchasing or creating companies as well as directly purchasing operating assets.

Even knowledgeable private investors often overlook these approaches to private equity, as they are perceived to be more difficult to access and implement. But these concerns do not hold when partnering with managers having in-depth resources and extensive experience. As well, the current environment for conventional private equity investing is often viewed as frothy; the end point on the chart I referred to earlier shows that the long-term illiquidity premium at the close of the first quarter of 2021 had widened to 4.9%. That means these strategies may be especially timely because relative to core private equity they often offer attractive entry points and the prospect of better long-term value.

Peter Burns is president and CEO of Commonfund Capital, a private capital solutions provider that has managed $17.8 billion in committed capital for endowed institutions, pension funds, high-net-worth individuals and family offices.