A conversation with CIO Mike Kelly: Finding true diversification in a concentrated market
The expansion of private markets reflects a confluence of trends that have been building for decades. The most telling is the steady decline in public companies. When I entered the industry, there were roughly 9,000 publicly traded companies. Today there are fewer than 4,000. Over the same period, the number of private companies rose sharply.
Several forces drove that shift. Industry consolidation created winner-take-all dynamics across sectors. Sarbanes-Oxley, now two decades old, raised the cost and burden of being public. Faced with that trade-off, more companies made a deliberate choice to stay private, and to stay private longer.
At the same time, private markets matured into a professionalized source of equity and credit. Companies gained access to capital they couldn’t tap before, which allowed many to remain private indefinitely. The implication for investors is straightforward: public markets alone no longer capture the full engine of economic growth. An increasing share of that growth now sits in the private market.
Twenty years ago, private equity was essentially one category, leveraged buyouts, and consisted of a relatively small investable universe. Since then, it has matured and grown enormously. But that growth has been concentrated, with vast amounts of capital flowing into the largest funds.
The result is a market that has split in two: mega and large cap private equity on one side, and the middle market on the other. Over time, the attributes that drive returns—sector exposures, valuations, sourcing, and exits—have diverged sharply between them. At the top end, those characteristics increasingly resemble public markets, similar concentrations, similar themes, similar valuations.
So if diversification is the goal, and it should be a core reason to invest in private equity, mega and large cap exposure delivers less of it. The middle market is where the real distinction lies. It carries different return drivers, lower entry valuations, and diversifying sector exposures vs. public markets and large cap private equity.
Now that public markets and the upper end of private markets have converged, private no longer automatically means diversifying. What matters is understanding what actually drives the returns, and that’s what makes the middle market compelling. It offers access to opportunities you won’t find in public markets, and on more favorable terms: lower entry valuations, more levers for value creation, and less leverage. It also offers greater exit optionality, since these companies don’t need to go public and can be sold to strategic buyers or larger financial sponsors.
But the most important attribute is influence. Here, a private equity investor can directly shape outcomes through operational improvements, backing companies that are already successful and helping them outperform competitors. A public shareholder can’t do that; the best you can do is buy well. Even across much of mega and large cap private equity it’s difficult, since those businesses are already highly efficient and optimized.
In the middle market, there’s room for specialized sponsors to work alongside management to integrate new technology, professionalize operations, expand margins and guiding strategic direction and M&A. The surface area to add value after the investment is greater than anywhere else in the market.
This is the single biggest challenge investors face today: concentration in one theme, the AI infrastructure buildout. On the public side, the top ten stocks now account for roughly 40% of the market, and most of those names are competing in the same race.
Investors should have exposure. It’s one of the most exciting transformations of our lifetime. But they should also look closely across their portfolios, because a pattern tends to emerge. Large cap private equity, growth equity, venture capital, real estate, the allocations look distinct, yet they are increasingly linked to the AI buildout.
There is a high degree of speculation. Investors are betting on the path ahead—whether it’s open or closed source, how the models evolve, and what the application layer will look like. Then they’re betting again on who wins along the way, and as with every major transformation over the last 200 years, there will be a few winners and many losers.
The middle market is different. You’re deploying AI, not building it. And I’d argue far more winners will come from those who put AI to work than from those racing to build it. That makes it both diversifying and, in some ways, lower risk, a compelling complement to a portfolio that steps away from one monolithic theme while taking on less uncertainty.
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