Private markets face a concentration test

With cracks beginning to show in the public markets, investors are looking for a diversified alternative which can offer downside protection against tech disruption. But private markets might not be much better.

By Jack Arrowsmith, London

As unprecedented levels of capital flow into Big Tech, public markets are throwing everything behind the development of AI.

According to UBS, the 10 largest stocks in the S&P 500 – which includes the “Magnificent 7” stocks of Microsoft, Apple, NVIDIA, Amazon, Alphabet, Meta and Tesla – account for close to 40% of the index’s total market capitalisation.

Concentration at this level surpasses any recent history: UBS puts that top-10 share at around 25% of the index during the dotcom era, and 15% in 1980.

This causes vulnerability concerns, heightened by the selloff hitting Samsung and SK Hynix, which in Q1 2026 accounted for around 60% of South Korea’s stock market.

Now that public equity markets carry this new level of risk, the search is on for alternatives which can provide a diversified return profile.

“Investors are looking for a value story that is somewhat removed from the public markets,” says Richard Hickman, managing director of listed private equity fund HarbourVest Global Private Equity (HVPE).

Private markets could be that alternative, and investors might be ready to make the switch. According to a 2026 survey by Schroders, half of equity and credit investors look across both the public and the private to meet portfolio objectives.

The appeal begins with the fact that, by definition, private markets do not have direct exposure to the Mag7 stocks which are driving this risk.

But that doesn’t mean they avoid concentration altogether. That can still exist, both through sector-level exposure to the tech industry, and company-level exposure to tech unicorns.

In the MSCI Global Venture Capital Index, the top 10 holdings accounted for 17.7% of index NAV in Q1 2026 (prior to the SpaceX IPO), while IT as a whole accounted for around 43%.

“Top-10 concentration at these levels in venture capital hasn’t been seen since Amazon and Yahoo dominated VC portfolios in the late 1990s,” says Uday Karri, Vice President, Research & Development, at MSCI.

And private capital’s tech concentration is not just about AI investment. GPs have long allocated heavily to software, a sector which was upended at the beginning of the year.

“If you look at large US buyouts, the share of their investments that was made up by software increased during covid from less than 20%, to nearly 50%,” explains Nils Rode, CIO of Schroders Capital.

However, this is not present across the board: Rode adds that it is not the case for European buyouts, or small and mid-sized US buyouts.

One advantage for buyout firms is that performance is more likely to be range-bound, meaning there is a lower risk of one high performer suddenly accounting for a large share of the portfolio. That is where the investors in VC funds are particularly vulnerable.

“Endowments have ended up with concentrated exposure by making large allocations to VC funds. The companies that then succeed might generate a 50x or 100x return, making them a large share of VC portfolios,” says Haresh Vizirani, managing director at Patria Investments.

The listed alternative

For those who are accustomed to the liquidity of public markets, investment trusts might be the first port of call.

But while they do offer diversification, the sector is also facing activist pressure which could undermine any efforts to spread risk.

In April, hedge fund Saba Capital succeeded in its third attempt to oust the board of Ballie Gifford-managed Edinburgh Worldwide Investment Trust (EWIT). What began as a criticism of the trust trading at a discount to its NAV would later include the board’s handling of EWIT’s SpaceX shares.

After the rocket company surpassed 10% of EWIT’s NAV, Ballie Gifford instructed the board to reduce the size of the position. This was followed by an employee tender which increased its implied valuation to $800bn, and an IPO which saw it valued at $1.77tn.

Saba argued that the board’s decision caused shareholders to lose out: even when managers look to spread risk, the upside from a concentrated bet can be hard for investors to resist.

One solution is to make even more fragmented bets, minimising the risk that any one company could ever come to dominate a portfolio.

For HVPE, Hickman explains that: “We have 1000 individual company positions of material size, but our largest single company exposure is only 1.6% of NAV.

“To reach 25% of our value creation in 2025, you would need our top 50 companies.”

These small bets could be particularly important for early-stage companies. Charlotte Morris, manager of listed private equity fund Pantheon International (PIN), explains that the fund’s disciplined approach in its exposure to cloud security business Wiz helped avoid concentration risk during the company’s rapid growth.

“Even after a 31x return, it only made up one percent of the portfolio,” she says. PIN’s exposure initially came through small stakes in investors Index Ventures and Insight Partners.

These listed vehicles then find themselves in a careful balancing act, where their appeal comes from capturing the value of early stage, high growth companies, but they still need to maintain a balanced portfolio.

The mid-market opportunity

Another option is to avoid making tech-related bets altogether, and turn back to more traditional sectors. But even that has caveats.

“There’s also risk for companies that are supporting AI expansion, such as those providing cooling and materials for data centres,” says Rode.

Many investors have favoured a ‘picks and shovels’ approach, investing in companies where the business model is not solely dependent on digital infrastructure. But if economic constraints slow the pace of the buildout, they could still be hit hard.

Rode argues that the track record of the mid-market shows it is the best approach for firms seeking genuine diversification and outperformance.

“The most resilient strategy over the last 25 years has been small and mid-market buyouts. It was the best performing or among the best performing strategy in 4 out of the 5 biggest crisis of the last 25 years,” he says, citing research by Schroders.

He attributes this to “lower leverage, more stable entry valuations, and a more broadly diversified sector mix than on the large side, where things tend to be more cyclical.”

Investor behaviour is reflecting this. CVC recently closed its mid-market Catalyst III fund at $3.4bn, surpassing its $2bn target, while Adams Street has raised $5bn for its private equity secondaries strategy, targeting investments in the lower-mid-market.

The mid-market may offer some uncorrelated returns for an asset class which is becoming increasingly cyclical.

“Whatever pocket of private markets an LP allocates to, the returns on their individual holdings are correlating more with each other than they used to,” says Karri.

“You cannot generalise across all of private markets: there are clearly areas of portfolios that aren’t subject to this concentration risk, but it does not apply universally,” adds Rode.

The sector offers no guarantees of protection from disruption: the SaaSpocalypse made that very clear. But a targeted approach for the few remaining uncorrelated sectors may become a critical hedge against disruption.