As regulators consider expanding access to private markets for retail investors, a critical question arises: can these markets effectively accommodate such a shift? The current framework presents challenges, including illiquidity, unclear performance metrics, and misaligned interests between fund managers and investors. These issues hinder institutional investors, and extending this framework to retail participants may exacerbate these weaknesses rather than provide broader investment opportunities.
Recent legislative efforts aim to facilitate access to private capital for retail investors. In August, the Trump Administration introduced an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” Meanwhile, European jurisdictions are also making strides; the UK government has lowered the minimum investment threshold for long-term asset funds to £10,000, while the EU’s Long-Term Investment Fund has no minimum requirement.
Understanding the challenges of private market investments
While opportunities for investing in illiquid or semi-liquid private markets seem to be increasing for retail investors, participating without a comprehensive understanding of these investments’ limitations could lead to substantial financial losses. Evaluating the actual performance of private markets poses considerable difficulties, as the returns reported by private funds are often vague and challenging to benchmark effectively.
Performance measurement complications
The inherently illiquid nature of private investments adds another layer of complexity. Typically structured with ten-year maturity periods, many private capital funds do not return capital as anticipated. An analysis by Palico shows that over 85% of 200 private equity funds failed to return investors’ capital within their expected timeframe. Furthermore, many successful venture capital funds can take more than a decade to realize profitable exits.
For investors seeking liquidity, options available in secondary markets are limited. While selling stakes is possible, such transactions are infrequent and often occur at a discount to the net asset value. The scale of secondary trading in private equity is notably small, accounting for less than 5% of the primary market, significantly lower than in public markets.
Market dynamics and performance trends
The lack of transparency in private markets raises important questions about performance. Historically, private equity funds from the 1990s and early 2000s outperformed their public market counterparts. However, with an influx of capital into the sector, this outperformance has diminished for newer vintages. Market saturation in developed economies has inflated asset valuations, complicating the ability of fund managers to consistently outperform their competitors or public markets.
Changing performance expectations
As market saturation increases, performance expectations for private equity have declined. Internal rate of return (IRR) targets, which were around 25% in 2000, have now dropped to approximately 15%. In response, some firms have adjusted traditional hurdle rates, increasing their share of capital gains beyond the historical 20% to ensure fund managers maintain their compensation even as returns decrease.
The industry is witnessing a shift where the focus has moved from generating significant investment returns to asset accumulation. Large private equity firms are allocating more resources into scalable strategies with lower returns, such as private credit and infrastructure. For example, Apollo Global Management manages around $700 billion in private credit compared to $150 billion in private equity. This trend indicates an increasing prioritization of fund managers’ financial interests over those of their clients.
The implications for retail investors
Private capital firms are actively pushing for further deregulation, seeking to expand their asset bases. However, this carries inherent risks. The private markets have faced scrutiny for alleged corruption and collusion, particularly in the lead-up to the global financial crisis, resulting in significant penalties for various private equity firms.
Moreover, the opaque nature of private markets complicates investors’ ability to assess the competence of individual fund managers. A notable example is Neil Woodford, a previously respected asset manager whose foray into private markets resulted in substantial underperformance and the collapse of his investment vehicle in 2019.
Recent legislative efforts aim to facilitate access to private capital for retail investors. In August, the Trump Administration introduced an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” Meanwhile, European jurisdictions are also making strides; the UK government has lowered the minimum investment threshold for long-term asset funds to £10,000, while the EU’s Long-Term Investment Fund has no minimum requirement.0
Recent legislative efforts aim to facilitate access to private capital for retail investors. In August, the Trump Administration introduced an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” Meanwhile, European jurisdictions are also making strides; the UK government has lowered the minimum investment threshold for long-term asset funds to £10,000, while the EU’s Long-Term Investment Fund has no minimum requirement.1
Recent legislative efforts aim to facilitate access to private capital for retail investors. In August, the Trump Administration introduced an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” Meanwhile, European jurisdictions are also making strides; the UK government has lowered the minimum investment threshold for long-term asset funds to £10,000, while the EU’s Long-Term Investment Fund has no minimum requirement.2