In almost all cases, increasing PE allocations as a percentage of total equity improved the overall probability of meeting or exceeding a 6% return. Interestingly, the 60/40 portfolio with 30% private equity (or 18% illiquid and 82% liquid assets) has the same 27% probability of achieving a 6% return as the 70/30 portfolio with no PE.
This illustrates the potential trade-off decisions investors may need to face. Here is a clear example where they can either increase risk allocations to maintain 100% portfolio liquidity or keep risk assets steady but take on some portfolio illiquidity to improve the chances of success.
Ultimately, these decisions may not be mutually exclusive. Depending on the investor’s comfort level with different risks and what they deem a minimum acceptable probability for achieving return objectives, they may pursue some combination of the above.
One avenue, of course, is to reassess how low a return can sustain the investor's objectives. In our examples, the probability of meeting a 6% return remains daunting, even with the addition of PE. However, if you lower the expected return to 4%, the probability significantly increases, ranging from 53% to 75% for the hypothetical portfolios in Figure 3.