The risk profile of portfolios, including private equity portfolios, is often determined based on traditional risk measures such as volatility and correlation. Past experience has shown that traditional risk measures, which can be useful in good times, are less reliable in a turbulent market environment where downside protection is particularly important. Consequently, the traditional approach leads to a risk of blind spots in portfolio construction for the investor. To get around this, investors should develop a deeper understanding of the extent to which a portfolio is exposed to long-term fundamental trends (megatrends) and the degree of robustness and "anti-fragility" it possesses.

Traditional approaches to private market portfolio construction focus on diversification by country, strategy, company maturity, industry, instrument (debt/equity), vintage year, and type of investment (primaries, secondaries, co-investments). While useful, these criteria are not an exhaustive list of portfolio diversification drivers. In addition, the risk profile of portfolios, including private equity portfolios, is often determined based on traditional risk measures such as volatility and correlation.

Tailwind from long-term secular trends

Although megatrends do not have a significant impact on expected returns for investments with a short holding period, they are particularly suitable for private equity investments due to their longer investment horizon. Therefore, it is important to use megatrend exposure as an additional variable in both private equity portfolio construction and the selection of individual investment opportunities.

Long-term trends spanning several decades - also known as secular trends or megatrends - can give a portfolio a long-term tailwind.

When different megatrends are independent of each other, they can be beneficial in terms of additional diversification with a long-term focus. While the classical dimensions of portfolio construction mostly refer to the technical aspects of different investments, the inclusion of megatrends as another dimension of portfolio construction allows to diversify a portfolio based on long-term changes in the real economy.