As we step into 2026, the consensus that private markets are the next frontier of investment opportunities is pervasive. However, this prevailing sentiment may be misguided. Current trends suggest that private markets are reflecting signs typical of late-cycle behavior, revealing structural similarities to situations that have precipitated past financial crises. Three primary characteristics emerge: risk segmentation, an almost perfect alignment of incentives across a broad supply chain, and a pervasive yet flawed perception of private market operations.
In examining the evolution of financial crises over the last two centuries, particularly the 2008–2009 global financial crisis (GFC), it becomes evident how various groups, including institutional allocators, financial consultants, fund managers, and wealth advisors, can act rationally in isolation while collectively heightening systemic risks.
Understanding systemic risk in private markets
To grasp the current dynamics in private markets, one must first appreciate that the proliferation of evergreen and semi-liquid investment vehicles does not signal financial innovation. Rather, these instruments serve as mechanisms to stockpile illiquid assets, postpone price discovery, and maintain a façade of stability. The concern here lies not with malevolent actors, but with a system where incentives are so closely aligned that even minor disturbances could lead to significant fallout. Retail investors, often the last link in this speculative supply chain, need to exercise heightened caution.
Lessons from historical financial crises
Reflecting on the last 235 years of financial history has instilled in me a profound awareness of a disconcerting truth: the most catastrophic financial crises usually do not stem from the actions of a few bad actors. This realization challenges the common tendency to simplify complex events by blaming a small number of individuals. Such narratives, while emotionally appealing, often fail to capture the full picture.
More frequently, financial crises are the result of countless individuals making billions of small, incentive-driven choices within a sprawling, disjointed system. Each participant typically reacts to local incentives that seem justifiable within their role, yet the cumulative effect of these actions can be perilous when they occur simultaneously and without sufficient accountability.
Key attributes of speculative behavior
One insightful way to analyze speculative behavior is to liken it to a manufacturing chain. Historical financial crises consistently reveal three core attributes, particularly when considering the GFC.
1. Segmented risk creation
The segmentation of risk within a linear supply system is a hallmark of systemic financial crises. Each segment contributes additional risk, yet no single participant possesses adequate visibility to comprehend how that risk accumulates throughout the system. During the GFC, for instance, independent mortgage originators relaxed their underwriting standards to boost loan production. These loans were then sold to investment banks, repackaged as mortgage-backed securities, and subsequently distributed to institutional and retail investors. While participants might have acknowledged incremental risks in their immediate context, few recognized how those risks were being magnified elsewhere in the chain.
2. Aligned incentives
The second characteristic critical to a systemic financial crisis is the near-total alignment of incentives among all participants. This alignment often extends well beyond the primary actors involved. During the GFC, mortgage originators, investment banks, and fund managers shared a common motivation: to maximize the volume of mortgage production and the issuance of securities. However, this alignment extended to ancillary entities like rating agencies and financial media, each benefiting from increased origination and securitization activities.
No significant participant had a compelling economic reason to slow down the production process. Fee structures, compensation dynamics, and market pressures all incentivized maintaining high output levels. Had even one critical segment been motivated to tighten production or underwriting standards, the crisis might have been mitigated, or at least less devastating.
3. Misguided assumptions
At the heart of every speculative phase lies a nearly universal assumption that often proves to be fundamentally erroneous. For example, in the early 1810s, many investors believed that farmland prices would remain high indefinitely. Similarly, in the late 1920s, the assumption that stock prices would never significantly decline led to rampant margin buying. During the GFC, there was a widespread conviction that residential real estate prices would never fall nationally.
This shared but flawed belief system allows participants within a speculative supply chain to systematically underestimate the incremental risks they introduce into the system. Because these misconceptions are rarely challenged and are often reinforced by recent experiences, they provide the psychological reassurance necessary for unchecked risks to persist.
The roles of key players in the private market landscape
Over the past two decades, institutional investment plans have significantly increased their allocations to alternative asset classes, notably private equity and private credit funds. This trend was propelled by institutional allocators, who initially observed remarkable returns generated by the Yale University Endowment in the late 20th century, leading to the belief that such allocations were essential to achieving similar success.
However, as allocations grew, underlying incentives shifted from capitalizing on perceived opportunities to preserving the professional roles created by these opportunities. Over time, career progression and job security became increasingly tied to the complexity of asset allocations instead of objective assessments of their outcomes. This entrenchment of incentives has led to self-reinforcing allocations to private markets, making moderation a significant career risk for allocators.
Investment consultants, who first emerged in the late 1960s, have also played a pivotal role in this evolution. Initially focused on performance reporting, their responsibilities expanded to include asset allocation advice and access to private markets. Unfortunately, this dual role has created conflicts of interest, as consultants now evaluate outcomes from portfolios they design, resulting in a powerful incentive to increase complexity without accountability.
As private equity faces challenges in realizing portfolio values, new structures like continuation vehicles and evergreen funds have emerged, further complicating the landscape. This shift diminishes the constraints historically associated with private equity fundraising, allowing for continued capital accumulation even amidst stagnation.