An investor sets a target allocation; say, twenty per cent to private markets, with the rest split across public equities and fixed income. They then do nothing, only to find out a year later that the private sleeve now makes up twenty-eight per cent of the portfolio. Nothing was bought. The allocation simply drifted, because public and private assets are priced on different schedules.

This is the denominator effect. It became well known during the sharp public market correction of 2022, and it hasn't gone away. Public assets reprice daily. Private assets are valued quarterly, so a market move takes weeks or months to show up in the appraisal. When public markets fall quickly, the private sleeve of a portfolio doesn't fall with it — not because it's more resilient, but because its stated value hasn't caught up yet. The private allocation therefore rises as a share of the total portfolio, sometimes beyond the limits an investor's own policy would otherwise permit.

The mismatch has grown in scale. Family offices now hold an average of 42% of their portfolios in alternative investments, with roughly 29% specifically in private markets, private equity, venture capital, and private credit combined. US family offices allocate even more, at closer to 54%. More than half of pension funds now exceed their own private equity allocation targets, the denominator effect showing up in real portfolios, at scale.

Public equity markets have also become more concentrated than at any point in the past three decades. The ten largest S&P 500 companies now make up around 41% of the index's total weight, above the roughly 27% peak reached during the dot-com bubble in 2000, and more than double the level seen as recently as 2015. That concentration barely moved even through the March 2026 market pullback. It raises the odds of a sharp, sector-specific correction that moves the public side of a portfolio quickly while the private side, once again, lags behind.

The picture has shifted a little since 2022 and 2023, when the denominator effect became a renewed source of acute anxiety among LPs. Some of that anxiety has cooled as portfolios have simply grown used to running above target. The mechanism hasn't changed. Pension funds are still overallocated at scale. Investors have just learned to tolerate it rather than fix it.

Rebalancing between public and private assets is far harder in practice than it looks on a spreadsheet. An investor can sell public equities in an afternoon. Reducing an over-target private allocation can't happen on the same timeline. It requires waiting for natural distributions, which have run well below historical norms, or turning to the secondary market; where stressed conditions are precisely when sellers have the least leverage.

That shortfall in distributions is real. Closed-end private equity funds returned just 12% of asset value to investors in 2025. That's barely half the 20-year average of around 20%, and 2025 was the fourth consecutive year in which distributions have remained near decade lows. For an investor relying on exits to fund the next commitment, or simply to bring an overweight allocation back into line, that's years of expected liquidity that hasn't shown up. Selling in the secondary market instead comes at a cost. LP-led stakes traded at average discounts of roughly13.6% to 13.9% to NAV in 2025, and that discount tends to widen precisely when sellers are under the most pressure to transact.

Avoiding private markets isn't the answer. The mismatch is common enough, and well enough understood, to plan around directly. That means building the public side of a portfolio with enough genuine liquidity, and the private side with enough pacing discipline, that a period of public market stress doesn't force an uncomfortable choice. The liquid portion of a portfolio should be treated as a deliberately managed reserve, not simply the inverse of the illiquid portion, and sized generously enough to absorb a denominator shock without forcing a sale of private positions at exactly the moment they're hardest to sell well.

Pacing matters too. Spreading new private commitments across market cycles, rather than concentrating them in a single vintage year, helps prevent a portfolio's private exposure from compounding in lockstep with a single moment of optimism. And it means being honest, at the point a commitment is made, about how much illiquidity a portfolio can actually absorb, not what a spreadsheet model says is optimal in a stable environment, but what stays comfortable if public markets fall and stay down longer than expected.

NAV lending and GP-led continuation vehicles are newer tools worth knowing, even for an adviser who uses them sparingly. NAV lending means borrowing against an existing private portfolio's value instead of selling out of it. Both tools have become mainstream parts of the private markets toolkit, generating liquidity or extending a holding period without the forced-sale discount that comes with a secondary sale. They also add leverage to an already illiquid position, so using them well is a judgement call for an adviser who understands both the structure and the portfolio it sits within, not a decision to make on the instrument's terms alone.

Private markets can offer return and diversification characteristics that are difficult to replicate in public markets.The point here is narrower: portfolios need to handle how public and private assets are actually priced, not just work smoothly when both sides happen to move in step. Investors who get through a public market correction comfortably are usually the ones who worked out, well before it arrived, how their portfolio's balance would shift, and built in the flexibility to let that happen without a forced decision.

The public-private split in a mature portfolio still moves. What matters is whether the investor decided in advance how much movement they can live with and built in enough liquidity to make that choice rather than have it forced on them.