The Risk of Taking Private Markets Public
For decades, private markets were an investment category for large institutions like universities, endowments, and pension funds. The common thread connecting these institutions: deep pockets, very long time horizons, and the ability to trade liquidity for the possibility of higher returns.
Those days may be changing.
A new policy shift could soon make private market investments available to millions of everyday Americans through their 401(k)s. The idea is simple and marketable: private markets promise diversification, the potential for higher returns, and supposedly smoother performance than public stocks and bonds.1
But investors would do well to approach this new frontier with caution. The evidence suggests the benefits of private-market investing are overstated, while the risks aren’t fully understood and/or appreciated.
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Start with the idea that private assets are less volatile. Data can make it appear that way, but it’s largely a matter of accounting. Because private holdings aren’t traded on open exchanges, their prices don’t update in real time. The result is what is known as “volatility laundering,” whereby risk looks more measured on paper than in practice. A recent analysis from Morningstar found that private assets can, in fact, be more speculative and leveraged than their public counterparts, with “stability” often reflecting a lack of transparency, not lower risk.
Performance is another area where the marketing outpaces the math.
The most common measure of private equity success, the internal rate of return (IRR), is not comparable to the annualized returns investors see on mutual funds, ETFs, or statements for separately managed accounts. IRRs can look impressive because they measure money flows rather than time, and early distributions can artificially inflate results. A 15% IRR does not mean the investor actually earned a 15% compounded annual return.
When researchers use better apples-to-apples performance comparisons, such as the private market equivalent (PME), which asks whether investors would have done better in a public index fund, the results become more clear-eyed. Median private equity returns have historically matched, not beaten, the public market once an investor accounts for fees, leverage, and liquidity. The averages tend to be pulled up by a small number of big winners, but most funds fall short.
What I’m describing above about private funds is not well known, and it may result in a rush to bring these strategies and products to the retail market, with many investors eager to participate. Asset managers are launching “semi-liquid” funds that blend private and public holdings, with limited redemption windows and higher fees. But if markets sour and redemptions surge, liquidity strains could ripple across the system.
For retirement savers, this investment trend raises a fundamental question: why complicate what’s already working? In my view, everyday investors do not necessarily need exposure to opaque, expensive funds to build wealth. Broadly diversified portfolios of stocks and bonds have delivered competitive long-term returns with full liquidity and far lower costs over time.
I’m not saying private investments have no place in a portfolio. For investors with the means, the patience, and the ability to evaluate managers closely, private funds can add diversification and potentially enhance returns. But for most 401(k) savers, the rush to “democratize” private equity looks more like a marketing push than a breakthrough in access. ‘Democratizing’ an asset class doesn’t necessarily democratize its best opportunities, which will likely remain reserved for the largest institutions.
Bottom Line for Investors
The growing push to open private markets to retail investors may sound like progress, but it’s worth remembering what makes retirement investing work in the first place: transparency, liquidity, and discipline. Public markets already give investors the ability to own a slice of long-term, global economic growth at a minimal cost. Adding complex, illiquid, and high-fee products to that mix could make retirement portfolios harder to manage, not necessarily better diversified.
The irony, in my view, is that the more these private funds are adapted to meet retail needs, by trading more frequently or disclosing more information, the more they start to behave like public markets. That reduces the so-called “illiquidity premium,” which is the very feature designed to produce higher returns in the first place.
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Inside, you’ll find:
If you have $500,000 or more to invest, claim your complimentary copy of the report and discover how shifting market trends could shape new opportunities in the months ahead.
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