The Convergence Thesis

For the better part of a century, the investment world has operated within clearly defined boundaries. Traditional asset managers focused on liquid, publicly traded securities, stocks, bonds, and increasingly, exchange-traded funds that offered daily liquidity and transparent pricing. Alternative asset managers concentrated on illiquid, private investments, buyout funds, venture capital, real estate, infrastructure, and credit strategies requiring patient capital and long lock-up periods.

These were separate ecosystems with distinct investor bases, operational models, regulatory frameworks, and cultural norms. Traditional managers served retail and mass-affluent investors who valued liquidity and simplicity. Alternative managers served institutions and ultra-high-net-worth individuals who could accept illiquidity in exchange for enhanced returns and diversification.

McKinsey's Great Convergence thesis asserts that these boundaries are collapsing. Innovative vehicles such as semi-liquid funds are bridging the liquidity gap, allowing retail and high-net-worth investors to access private market returns without committing capital for a decade. Active ETFs are bringing active management strategies into low-cost, transparent structures that retail investors understand and trust. The recalibration toward local investing is creating opportunities for regional managers who understand local markets and can deploy capital more nimbly than global giants.

The magnitude of this opportunity is staggering. McKinsey projects up to $4 trillion in "money in motion" over the next five years driven by the convergence trend alone. When combined with other major industry shifts including the rise of active ETFs and geographic reallocation, the total opportunity reaches $10.5 trillion, roughly equivalent to the entire GDP of China.

This is not speculative forecasting based on optimistic assumptions. This is structural change driven by investor demand, regulatory evolution, technological innovation, and competitive dynamics that are already reshaping the industry. The COVID-19 pandemic accelerated digital adoption and remote access, making it easier for retail investors to participate in sophisticated strategies. Regulatory frameworks have evolved to permit broader distribution of private market products while maintaining investor protections. Technology platforms have reduced operational costs and improved user experiences, lowering barriers to entry for both managers and investors.

The convergence manifests in multiple forms across the wealth management ecosystem. Insurance companies are embedding private and public investments within unified mandates, leveraging their asset management capabilities to create enhanced value within investment portfolios. This represents a significant shift toward integrated, total portfolio solutions that optimize returns across multiple asset classes while satisfying regulatory and risk management requirements.

Wealth managers are rethinking client segmentation and product architectures. The traditional division between retail platforms offering only liquid products and private banking platforms serving only wealthy clients is giving way to tiered access models where high-net-worth and even mass-affluent investors can allocate to private markets through semi-liquid vehicles with lower minimums and periodic liquidity.

Product innovation is accelerating as managers compete to capture market share in this evolving landscape. Business Development Companies (BDCs) have brought private credit to public markets, trading on exchanges while investing in middle-market loans. Interval funds offer periodic liquidity windows, quarterly or annually, allowing investors to redeem shares without daily trading. Tender offer funds repurchase shares periodically at net asset value, providing limited but predictable liquidity.

These vehicles are not merely incremental improvements; they are fundamentally different structures that challenge the traditional binary choice between daily liquidity with lower returns or decade-long lock-ups with higher returns. They represent a spectrum of liquidity and return profiles that allow investors to optimize based on their specific circumstances, time horizons, and risk tolerances.

The implications cascade throughout the industry. Traditional asset managers who built their franchises on liquid products must now develop private market capabilities or risk losing clients to integrated competitors. Alternative managers who historically ignored retail investors must now create products and distribution strategies suitable for broader audiences. Both face intense competition from new entrants, fintech platforms, direct indexing providers, and digital wealth managers, that are building integrated ecosystems from inception rather than retrofitting legacy infrastructures.

For investors, the convergence creates both opportunity and complexity. Access to previously exclusive asset classes can enhance diversification and returns, but it also introduces risks that many investors may not fully understand. Liquidity, even in semi-liquid structures, is not guaranteed during market stress. Valuations in private markets lack the daily price discovery of public markets, creating potential gaps between reported net asset values and realizable values. Fees, often higher in alternative structures, can erode returns if not justified by performance.

The Great Convergence is not a rising tide that lifts all boats equally. It is a competitive battleground where winners will capture disproportionate market share and losers will face existential pressures. The $10.5 trillion opportunity is not a prize awarded equally; it is a market to be won through superior strategy, execution, and client value delivery.

60-20-20 Portfolio Evolution

The most visible manifestation of the Great Convergence is the evolution of portfolio construction from the traditional 60-40 model, 60% equities, 40% bonds, toward 60-20-20 structures that strategically blend public equities, public fixed income, and private alternatives. This is not a minor tactical shift but a fundamental reconceptualization of how diversification, risk management, and return generation are approached in modern portfolios.

The traditional 60-40 model emerged in an era when bonds provided reliable income, meaningful diversification from equities, and served as effective portfolio hedges during equity market downturns. For decades, this framework worked precisely as intended. When stocks declined, bonds typically rallied, cushioning portfolio losses and providing dry powder for rebalancing into cheaper equities. When stocks rallied, the bond allocation provided stability and reduced overall portfolio volatility.

That world is gone, or at least profoundly altered. The historic Treasury market losses of 2022, the worst annual performance since 1788, shattered confidence in bonds as safe havens. The correlation between stocks and bonds, which had been reliably negative for most of the post-financial-crisis period, turned positive during inflationary episodes, eliminating the diversification benefit that made the 60-40 model effective.

Simultaneously, alternative investments were posting impressive performance and demonstrating low correlation to public markets. Private equity delivered returns exceeding public equities with lower reported volatility, though questions remain about whether this reflects genuine risk reduction or merely smoothed valuations. Private credit offered yields substantially above public bonds with seniority and covenant protections that enhanced downside protection. Real assets including infrastructure, real estate, and commodities provided inflation hedges that traditional portfolios lacked.

The convergence initially emerged within ultra-high-net-worth client segments where minimum investment requirements, illiquidity tolerance, and sophisticated governance structures enabled access to private markets. Family offices and institutional investors have long allocated 30-50% or more to alternatives, and their performance, particularly during the 2008 financial crisis and COVID-19 pandemic, validated the diversification benefits.

The innovation of semi-liquid vehicles has extended this model to high-net-worth investors who cannot commit millions for a decade but can allocate hundreds of thousands with quarterly or annual liquidity. Business Development Companies, interval funds, and private REITs have created access points that were previously unavailable, allowing wealth managers to construct 60-20-20 portfolios for clients with $1-10 million in investable assets.

The mass-affluent market, investors with $100,000 to $1 million in assets, represents the next frontier for this convergence. While current regulatory and operational constraints limit broad access, the trajectory is clear: lowering minimums, improving liquidity terms, and reducing fees to make alternatives accessible to a much broader investor base.

The 60-20-20 model is not a rigid prescription but a framework that can be customized based on individual circumstances. Younger investors with long time horizons and high risk tolerance might allocate more aggressively to private equity and venture capital, seeking capital appreciation over decades. Older investors nearing retirement might emphasize private credit and infrastructure, prioritizing income and capital preservation. Investors with specific values or interests might tilt toward impact investments, sustainable assets, or sector-specific strategies aligned with their expertise or passions.

The 20% alternative allocation itself can be diversified across multiple strategies: private equity for growth, private credit for income, real estate for inflation protection, infrastructure for defensive characteristics, and venture capital or growth equity for asymmetric upside. This diversification within alternatives enhances overall portfolio resilience and creates multiple sources of return that are not dependent on public market performance.

Implementation, however, introduces significant complexity. Selecting managers is critical; the dispersion between top-quartile and bottom-quartile alternative managers is far wider than in public markets. Due diligence must be rigorous, evaluating track records, investment processes, operational capabilities, and alignment of interests. Liquidity management becomes more challenging when 20% or more of the portfolio is illiquid or semi-liquid, requiring careful planning to ensure sufficient access to capital for near-term needs.

Fees are another critical consideration. Traditional 60-40 portfolios can be implemented cost-effectively through index funds and ETFs charging 10-20 basis points annually. Adding alternatives typically introduces management fees of 1-2% plus performance fees of 10-20% above hurdle rates. These fees can be justified if performance exceeds public market equivalents after fees, but they require careful evaluation and ongoing monitoring.

Tax efficiency is also more complex in 60-20-20 portfolios. Private equity and venture capital generate capital gains that can be long-term and tax-advantaged, but distributions are unpredictable and may create tax liabilities when least convenient. Private credit often generates ordinary income taxed at higher rates. Real estate provides depreciation benefits but can trigger unrelated business taxable income in retirement accounts. Comprehensive tax planning is essential to avoid erosion of after-tax returns.

Despite these complexities, the migration toward 60-20-20 is accelerating and appears irreversible. Investors who experienced the 2022 bond market collapse understand that traditional diversification may not protect them as expected. Those who observed private market performance during COVID-19 recognize that alternatives can provide genuine diversification and return enhancement. The question is not whether to allocate to alternatives, but how much, in what strategies, and through which vehicles and managers.

Generational Market Reset

New York Life Investments' characterization of 2025 as a "generational opportunity" in private markets echoes and amplifies McKinsey's convergence thesis. After years of unprecedented monetary stimulus, zero interest rates, and pandemic-driven disruption, private capital markets are entering what New York Life describes as "a new phase of recalibration and opportunity."

The global macroeconomic backdrop changed markedly in the first half of 2025 due to policy uncertainty impacting businesses and markets globally. Diverging global rate cycles, with some central banks cutting while others maintain restrictive policies, create both challenges and opportunities for private market investors who can deploy capital tactically across geographies and strategies.

Interest rates, while elevated relative to the post-financial crisis period, are moving lower as inflation moderates and central banks prioritize growth over price stability. This shift creates enhanced borrowing opportunities for private market participants who can access credit on more favorable terms than during the peak rate hiking cycle. Leverage, which became expensive and scarce in 2022-2023, is once again available at reasonable costs, amplifying returns for strategies that employ prudent levels of debt.

Private equity's shift toward public markets reflects this recalibration. Over 53% of global private equity deals year-to-date involve public investments, take-privates, PIPE deals, and carve-outs, compared to just 25% five years ago. This dramatic shift reflects the deployment challenge facing mega-funds sitting on record dry powder and the relative attractiveness of public market valuations despite the premium required for take-private transactions.

Take-private deals typically require premiums of approximately 30% above current market valuations, and purchase price multiples for these transactions range from 1.5x to 4.5x the median U.S. buyout multiple. This premium creates pressure on returns and necessitates sophisticated value creation strategies to justify acquisition prices. Yet for mega-funds with billions to deploy, public markets offer the scale, liquidity, and transaction certainty that middle-market deals cannot provide.

The middle market, by contrast, may offer more attractive risk-adjusted returns for investors willing to accept smaller deal sizes and more hands-on involvement. Middle-market companies have demonstrated 10.7% year-over-year revenue growth while purchase multiples remain approximately 25% lower than those required for large take-private transactions. This valuation gap, combined with strong growth fundamentals, suggests superior value opportunities for investors who can source, underwrite, and execute middle-market transactions.

The commercial real estate sector exemplifies the recalibration theme. After experiencing inflation pressures and elevated debt costs that constrained investment activity, the market is showing signs of stabilization. Private investment managers raised $86 billion through August 2025 for North American CRE investment. If fundraising continues at the current pace, year-end totals could reach $129 billion, representing a 38% increase from 2024.

Brookfield Strategic Real Estate Partners V closed at $16 billion, while Carlyle Realty Partners X secured $9 billion, both representing the largest real estate funds each firm has ever closed. These mega-closings indicate that institutional investors are committing substantial capital to real estate strategies despite recent market volatility, validating the view that current conditions represent buying opportunities rather than reasons for caution.

Columbia Threadneedle's 2025 Global Real Estate Outlook identifies the current period as a potential turning point for property markets. Global property prices have largely stabilized, and buyer-seller expectations are converging, though divergence remains by sector and geography. A "barbell" investment approach is gaining favor, focusing on opportunities at both ends of the value spectrum: logistics and living sectors driven by e-commerce growth and housing shortages, and prime retail in European capitals and tourist destinations where scarcity and location create pricing power.

Retail is returning to investor agendas after years of distress and disinvestment. Retail warehousing is favored at the value end, benefiting from the last-mile delivery infrastructure required for e-commerce. Prime high streets in cities like Paris, London, and Barcelona are favored at the luxury end, where international tourism and limited supply create resilient demand and pricing power.

The democratization of private assets is accelerating as wealth investors' share of private credit grows and institutional allocations to private markets continue expanding. This democratization is facilitated by the semi-liquid vehicles and portfolio construction evolution discussed previously, but it also raises critical questions about investor sophistication, risk understanding, and the potential for misallocation.

The generational opportunity thesis rests on several assumptions that merit examination. First, that current market conditions, stabilizing interest rates, converging valuations, and abundant dry powder, create a buying window that will not persist indefinitely. Second, that private markets will continue delivering returns superior to public markets after adjusting for illiquidity and complexity. Third, that the infrastructure necessary to support broader investor participation, product innovation, manager capacity, operational systems, will scale efficiently without compromising performance or investor protection.

These assumptions may prove correct, but they are not certainties. Interest rates could reverse course if inflation resurges. Private market returns could compress as capital floods in and competition for deals intensifies. Semi-liquid vehicles could face stress-testing during market dislocations that reveal liquidity to be less available than expected.

For sophisticated investors evaluating this generational opportunity, the strategic imperative is clear: understand the structural changes underway, position portfolios to benefit from convergence and recalibration, but maintain discipline around valuations, manager selection, and risk management. This is not a moment to chase returns through excessive risk-taking or to abandon traditional portfolio construction principles in favor of unproven strategies.

Investment Implications

The Great Convergence and the generational opportunity it represents demand a thoughtful, strategic response from investors, wealth managers, and allocators across the spectrum of sophistication and scale. The $10.5 trillion transformation is not a passive development to be observed; it is an active opportunity to be captured or a competitive threat to be defended against.

For individual investors and family offices, the convergence thesis suggests that traditional 60-40 portfolios are increasingly inadequate for achieving long-term financial goals. The migration toward 60-20-20 or even more aggressive alternative allocations should be evaluated based on individual circumstances: time horizon, liquidity needs, risk tolerance, and access to quality managers and vehicles.

Younger investors with decades until retirement can accept longer lock-up periods and higher illiquidity premiums in exchange for enhanced returns. Private equity, venture capital, and growth strategies may be particularly suitable, offering capital appreciation potential that compounds over long time horizons. These investors should focus on manager selection and portfolio construction within alternatives, ensuring diversification across vintages, strategies, and geographies.

Older investors nearing or in retirement face different constraints. Liquidity needs are higher as portfolios transition from accumulation to distribution. Risk tolerance is typically lower as time horizons shorten and the ability to recover from losses diminishes. For these investors, private credit, infrastructure, and core real estate may be more appropriate, offering income, stability, and inflation protection without the volatility or long lock-ups of private equity.

Mass-affluent investors with limited assets face the greatest challenges and potentially the greatest opportunities. Access to top-tier managers and best-in-class vehicles is often restricted by high minimums and limited distribution. Semi-liquid funds and alternative vehicles offered through retail platforms may be accessible, but fees are often higher and terms less favorable than institutional share classes.

For these investors, education and selectivity are critical. Understanding what alternatives actually offer, return enhancement, diversification, or both, and evaluating whether specific vehicles deliver on these promises requires diligence that many retail investors may lack. Working with qualified advisors who understand alternatives and can conduct proper due diligence is essential, but it introduces advisory fees that further erode net returns.

Wealth managers and advisors face their own strategic imperative: develop alternative investment capabilities or risk losing clients to competitors who offer integrated solutions. The convergence is creating client demand for access to private markets, and advisors who cannot provide it will lose assets to those who can.

This requires investment in education, product evaluation, manager due diligence, and operational capabilities to administer alternative investments. It also requires cultural change, moving from a world where advisors recommend portfolios of mutual funds and ETFs to one where they construct customized allocations across public and private markets, manage liquidity across illiquid holdings, and educate clients on risks that are more complex than equity volatility.

Asset managers, both traditional and alternative, face existential questions about positioning and competitive strategy. Traditional managers must decide whether to build alternative capabilities organically, acquire alternative managers, or partner with specialists to offer clients integrated solutions. Alternative managers must decide whether to create semi-liquid products for broader distribution, accept the complexity and regulatory burden that comes with retail investors, or remain focused on institutional and UHNW clients.

The winners in this transformation will be those who can deliver genuine value, superior returns, effective diversification, excellent client service, and transparent fee structures, while building trust and demonstrating alignment with client interests. The losers will be those who chase short-term asset gathering through aggressive marketing of complex products to unsophisticated investors without regard for suitability or outcomes.

Regulatory oversight will intensify as alternatives penetrate retail markets. Regulators will scrutinize liquidity provisions, fee disclosures, valuations, and suitability determinations to ensure investor protection. Managers and advisors who fail to meet heightened standards will face enforcement actions, reputational damage, and loss of business.

The $10.5 trillion opportunity is real, but it is not a guarantee of success for any individual participant. It is a market to be earned through expertise, discipline, and client-centric execution. For those who navigate this transformation successfully, the rewards will be substantial: growing assets under management, satisfied clients who achieve their financial goals, and sustainable businesses built on value creation rather than asset gathering.

For those who misstep, overpromising returns, underestimating risks, or prioritizing growth over client outcomes, the consequences will be equally significant: underperformance, client attrition, regulatory scrutiny, and ultimately, irrelevance in a market that demands excellence and punishes mediocrity.