Private markets have become an increasingly significant component of institutional portfolios. They are not just sources of capital but can also be catalysts for long-term value creation, governance, and market maturity. What exactly are institutional investors looking for when they evaluate these opportunities? In this post, we explore how institutional investors evaluate private market opportunities, from some key criteria and due diligence to evolving preferences and risk frameworks.

Institutional Investors

What is an Institutional Investor?

An institutional investor is a professional investor who pools together capital with other institutional investors and invests on behalf of others. Institutional investors account for large and frequent trades on behalf of organizations they represent, and typically at much higher volumes than retail investors. Because of their dominance, institutional buying or selling can lead to big price moves in individual stocks and in the market overall.[1]

There are several types of institutional investors: banks, credit unions, pension funds, insurance companies, mutual funds, endowment funds, sovereign wealth funds, hedge funds, venture capital funds, and real estate investment trusts, among others.

Institutional investors may be entitled to preferential treatment and lower fees. They also can be subject to fewer protective rules because typically they are more qualified traders than individuals and are better able to understand the financial markets.[2]

Types of Institutional Investors

Pension Funds

Pension funds have a singular goal, to fund the pension payments promised to employees when they retire. The long horizon of this goal and the steady stream of new employees requires pension funds to seek growth and gives them the ability to take a long-term view on investing. As a result, pension funds usually have an allocation to private equity, which averages around 14% overall today.[3]

Endowment Funds

An endowment fund is a pool of capital established by a foundation, typically held by a non-profit organization such as a university, charity, or hospital. The organization makes consistent withdrawals for a particular purpose and the fund may often be designed to continue indefinitely.[4]

Sovereign Wealth/National Reserve Funds

A sovereign wealth fund is a state-owned investment fund comprised of money generated by the government, often derived from a country’s surplus reserves, providing a benefit for a country’s economy and its citizens.[5] State-owned investment funds represent an enormous pool of capital, often held by a central bank, giving it significant economic importance. Since the goal of the ruling authority is the ongoing running of a country, the time horizon for investments can be very long. The allocation of sovereign wealth funds to private equity is growing. Over half of SWFs (56%) now invest in private credit and 69% plan to increase their allocations significantly or moderately.[6]

What Institutional Investors Look for in Private Markets

Institutional investors evaluate private market opportunities based on both qualitative and quantitative metrics to ensure alignment with long-term portfolio goals. Take a look at some of the criteria that institutional investors look for when identifying private market opportunities.

Strategy Fit

The first question most institutional investors ask is whether a private market opportunity aligns with their broader portfolio strategy. This could mean adding exposure to a specific asset class (e.g., private equity or real assets), balancing geographic allocation, or for helping to mitigate risk. Managers that clearly articulate how their strategy fits into institutional objectives, such as diversification, inflation hedging, or alpha generation, may be more likely to get traction.

Track Record & Team

A track record of performance is important, but institutions go deeper than headline numbers. They’re looking for repeatability; has the team demonstrated the ability to execute a clear, consistent investment process across cycles? They also examine team dynamics like how decisions are made, who holds key relationships, and what the succession plan looks like.

Fund Structure

Institutional investors may often seek transparency and fair economics. Fee structures, preferred return terms, co-investment rights, and capital commitment by the general partner should all be evaluated to assess alignment of interest. A well-aligned fee structure could signal confidence and shared risk, elements that may build trust with sophisticated investors.

Market Opportunity

Beyond the manager, the market itself must be compelling. Institutional investors are looking for opportunities where there’s clear potential for value creation, whether through growth, operational improvement, or market inefficiencies. Institutional investors may choose to assess the size of the opportunity, its durability, and the manager’s unique edge in accessing or executing within it.

ESG Considerations

Environmental, social, and governance (ESG) factors are increasingly embedded in institutional diligence. There is a now growing emphasis on responsible investing and impact metrics, so many institutions are now requiring robust ESG frameworks and reporting, particularly in sectors with regulatory or reputational sensitivity.

Due Diligence Process for Institutional Investors

Investment and Due Diligence

Institutional due diligence covers both investment and operational aspects. Once a strategy passes the initial screen, it moves into a deeper diligence phase. This includes a full review of past deals, team bios, investment memos, and governance practices. Managers who cannot clearly articulate their value proposition or strategy alignment may not be able to advance beyond this stage.

Operational due diligence (ODD) has become a major focus. Institutions want to see that fund managers have robust internal systems—covering compliance, valuation, reporting, and audit functions. A weak operational foundation can be a red flag, even if the investment thesis is strong.

Risk and Performance Analysis

Meetings with the investment and operations teams are standard, often supplemented by reference checks with other LPs, portfolio company executives, or co-investors. Risk is assessed from multiple angles, including macroeconomic exposure, key-person dependencies, and exit assumptions. Many institutions build independent models to test strategy resilience under various scenarios.

Return Expectations and Risk Tolerance

While returns are obviously important, institutions assess them within the context of risk, time horizon, and liquidity. Expectations can be shaped by the role a strategy plays within the overall portfolio, whether it’s growth-oriented, income-generating, or intended to hedge against inflation or volatility.

Return expectations vary across asset classes and strategies, so investors may seek outcomes that are equal to the complexity and liquidity of the investment. Strategies with higher perceived risk or longer time horizons may be expected to deliver higher growth, while those that offer more stability or cash flow may have more moderate expectations.

Risk Tolerance

Understanding the risks that institutional investors can face is very important. Institutions rarely look at returns in isolation. They may focus on risk-adjusted metrics because these measures could help determine whether the opportunity justifies its complexity and illiquidity when compared to public market equivalents.

Time Horizon

Institutions can tolerate long lock-ups, but only when the strategy aligns with their liquidity needs and long-term obligations. Pension funds, for example, may be comfortable with a ten-year fund life, whereas foundations or endowments may need more flexible structures.

Evolving Institutional Preferences

As private markets mature and competition intensifies, institutions are adapting their approaches to gain more control, reduce fees, and diversify their portfolio. More institutions are seeking co-investment opportunities to help reduce fees and increase exposure to specific deals. They’re also building in-house capabilities to pursue direct private market investments, often in partnership with GPs.

Rather than broad-based buyout funds, institutional capital is flowing into differentiated strategies—sector specialists, regional emerging markets, and ESG or climate-focused funds. Differentiation could be a factor needed to stand out in a competitive fundraising environment.

Final Thoughts

At the end of the day, institutional investors may be looking for more than just growth. They’re typically seeking alignment, discipline, and a repeatable strategy backed by sound execution and governance. Private markets may offer complexity, but institutions are increasingly embracing that complexity with structure, patience, and a long-term vision.

Want to learn more about investing in private companies? Check out the following blogs to learn more:

• Untapped Potential: Investing in Emerging Sectors
• Unlocking Opportunity: Buying Shares in Private Companies
• Common Pitfalls: Mistakes in Venture Capital Investing
• How to Value Startups: The Berkus Method

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

 

[1] https://www.finra.org/investors/insights/institutional-investors-and-smart-money

[2] https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/institutional-investor/

[3] https://www.investmentcouncil.org/wp-content/uploads/2024/07/2024-AIC-Pensions-Report_final.pdf

[4] https://www.moonfare.com/pe-masterclass/private-equity-investor-types

[5] https://www.investopedia.com/terms/s/sovereign_wealth_fund.asp

[6] https://www.preqin.com/news/sovereign-wealth-funds-plan-increased-allocations-to-private-credit-invesco

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.