As the regulatory landscape evolves, there is a growing trend to open private markets to a broader spectrum of investors, particularly retail participants. This shift raises an important question: can the existing structure of private markets effectively accommodate retail access? Institutional investors currently grapple with issues such as illiquidity, opaque performance reporting, and misaligned incentives between fund managers and their clients. The current fee structures, designed for larger investments, and the limited accountability mechanisms in place suggest that extending the model to smaller investors could exacerbate these challenges rather than fostering true democratization of investment opportunities.
In August, the Trump Administration issued an executive order aimed at broadening access to alternative assets for 401(k) investors. This initiative reflects a growing recognition of the need to provide retail investors with equal opportunities to participate in private capital markets. Meanwhile, European nations have also made strides in this area; for instance, the UK government has set a minimum investment for long-term asset funds at just £10,000, while the EU’s Long-Term Investment Fund allows investments with no minimum threshold.
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Assessing the realities of private market investments
While the notion of retail participation in private markets is appealing, it is essential for investors to grasp the inherent limitations before diving in. Evaluating the actual performance of private investments is notoriously difficult due to a lack of transparency. Reported returns are often ambiguous and cannot be precisely compared against benchmarks. Moreover, the illiquid nature of these investments complicates the situation further. Typically, private capital funds are structured with ten-year maturities, yet many fail to distribute capital as anticipated.
Research from Palico highlights this issue, revealing that over 85% of private equity (PE) funds do not return capital to investors within the expected timeframe. Successful venture funds often take a decade or more to achieve profitable exits. Even when secondary markets provide a potential solution for liquidity, they are limited in scope. Transactions occur infrequently and often at significant discounts to net asset value, representing less than 5% of the primary PE market.
Challenges of performance evaluation
The lack of transparency in private markets raises critical questions about performance. Historically, funds from the 1990s and early 2000s outperformed public market investments. However, as capital inflows have surged, the ability of newer vintage funds to maintain this outperformance has diminished. This saturation of the market in developed economies has inflated asset valuations, making it increasingly challenging for fund managers to consistently outperform both their peers and public markets.
As a result, performance targets in private equity have steadily declined. The internal rate of return (IRR) goals that once averaged around 25% in 2000 have now dropped to approximately 15%. To counteract this decline, some firms have altered their compensation structures, reducing or eliminating the traditional 8% hurdle rate and increasing their share of capital gains beyond the historical 20%, ensuring that managers’ compensation remains intact despite shrinking returns.
The shifting dynamics of fund management
The landscape of private equity is evolving, with a noticeable shift in focus from generating high returns through strategic investments to accumulating assets. Major fund managers are increasingly directing capital toward scalable, lower-return strategies such as private credit and infrastructure. For example, Apollo Global Management manages about $700 billion in private credit, compared to $150 billion in private equity. This transition reflects a tendency for managers to prioritize their profitability over that of their clients.
With retail investment products now entering the scene, private capital firms are adopting similar models to those used with institutional investors, focusing on stable credit and real estate exposures rather than the higher-risk, higher-reward potential associated with private equity and venture capital. As competition for deals intensifies, the emphasis has shifted towards scale rather than performance, prompting firms to prioritize fundraising efforts, often at the expense of their core investment strategies.
The risks of deregulation
In their quest for greater assets under management, private capital firms are actively lobbying for further deregulation. However, this approach carries significant risks. The market euphoria leading up to the global financial crisis revealed numerous instances of alleged corruption and collusion within private markets, resulting in heavy penalties for some of the largest private equity firms.
Moreover, the opaque and illiquid nature of private investments makes it difficult for investors to assess the competence of individual fund managers. A striking example is Neil Woodford, a prominent asset manager who struggled with fund allocation in private markets, leading to the collapse of his Woodford Equity Income fund in 2019, which lost over £5 billion in value.
In August, the Trump Administration issued an executive order aimed at broadening access to alternative assets for 401(k) investors. This initiative reflects a growing recognition of the need to provide retail investors with equal opportunities to participate in private capital markets. Meanwhile, European nations have also made strides in this area; for instance, the UK government has set a minimum investment for long-term asset funds at just £10,000, while the EU’s Long-Term Investment Fund allows investments with no minimum threshold.0
In August, the Trump Administration issued an executive order aimed at broadening access to alternative assets for 401(k) investors. This initiative reflects a growing recognition of the need to provide retail investors with equal opportunities to participate in private capital markets. Meanwhile, European nations have also made strides in this area; for instance, the UK government has set a minimum investment for long-term asset funds at just £10,000, while the EU’s Long-Term Investment Fund allows investments with no minimum threshold.1
