Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Dylan Cox. He's an analyst at PitchBook. Hello.

Dylan Cox: Hi, Holly. How are you?

Black: I'm good. So you're looking at all things private equity. So I'll ask for the uninitiated, what is private equity?

Cox: So, private equity in a very broad sense just refers to investments in non-traded securities. But more colloquially, we're referring to investments in pooled or commingled closed-end private capital vehicles. And this includes investing in strategies such as buyouts, venture capital, secondaries, funds, private debt, private real estate, and fund of funds, just to name a few.

Black: So, you named an awful lot of exciting investment words there. So why can private equity be quite a good diversifier for an investment portfolio?

Cox: Well, the evidence on diversification in private markets is a bit mixed. But generally, one of the main drivers for institutional investors to allocate into private markets is the famous illiquidity premium that comes with the 8 to 10-year lockup on these funds. And so in that way, it's almost a behavioural hack, so that institutional investors aren't tactically allocating into and out of private market vehicles, but instead have more stable long-term allocations.

Black: And investors usually get quite excited about unlisted stocks, because it's where some of the most exciting names are that we've heard of, but what are some of the biggest themes in private equity at the moment?

Cox: Sure. So, within venture capital, which is sort of a subset of private markets, we've seen capital raise figures and also valuations for these startups really rise dramatically in the last few years, and more later stage investing in what we refer to as leveraged buyouts. We've seen an increase in activity across the board regardless of geography or sector in most cases, we've also seen an increase in pricing there, which is fairly consistent with what most investors have seen in public markets as well.

Black: Before we get carried away with how amazing private equity is, what are some of the risks we need to be aware of in this space?

Cox: Well, we mentioned that illiquidity premium earlier, and that is something investors should be aware of because there's generally 8 or 10 or 12-year lockup with any funds invested in these pooled vehicles. And then, you know, depending on the sub strategy within private markets, you have many of the same, say credit risks in private debt funds or just, underwriting risks as you would with a public stock but for private equities, you have competitive pressures and changing sector dynamics as well.

Black: Dylan, thank you so much for your time. For Morningstar I'm Holly Black.