As regulators move to open private markets to a broader investor base, the question is not whether retail access should be allowed, but whether the structure of these markets can support it. Illiquidity, opaque performance reporting and misaligned incentives between fund managers and investors already pose challenges for institutional participants. With compensation structures built for scale and governance mechanisms that provide limited accountability, expanding the model to smaller investors risks reinforcing these weaknesses rather than democratizing opportunity.
New legislation aims to grant private investors universal access to private capital. In August, the Trump administration issued an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.”[1]
The European authorities must not lag behind. The British government has done that set the minimum to invest in long-term asset funds[2] as low as £10,000. The European Union’s long-term investment fund[3] product does not impose a minimum.
Although illiquid or so-called “semi-liquid” private markets are now accessible to most retail investors, participation without understanding their limits can prove costly.
Blurry performance and poor liquidity
Assessing the actual performance of private markets is difficult. Reported returns are often opaque and cannot be accurately benchmarked.[4] The illiquid nature of these investments compounds the problem. Although private equity funds are typically structured with ten-year terms, few distribute their capital on time.
A Palico analysis of 200 private equity (PE) funds found that more than 85% failed to return investors’ capital within that time frame, and many successful venture capital funds take more than a decade to achieve a successful exit.[5]
Secondary markets provide limited relief. Although investors can sell their shares, transactions are sporadic and often completed at a discount to net asset value. The scale is also small compared to the public markets: secondary trading represents less than 5% of the primary market in PE,[6] and less than 1% in private credit.[7] Once investors commit, they cannot easily exit and price transparency is minimal.
The opacity inherent in private markets also raises a crucial question about performance. While PE vintage funds of the 1990s and early 2000s continued to deliver better returns on average than those of the public markets, despite the massive inflows of capital allocated to the sector, the outperformance of recent vintages has declined.
Overallocation led to market saturation in developed economies,[8] inflating asset valuations and making it more difficult for fund managers to consistently and persistently develop a sustainable angle to beat their peers or even the public markets.
Performance erosion
Due to market saturation, PE performance targets have been steadily reduced. Typical internal rate of return (IRR) targets have fallen from about 25% in 2000 to about 15% today. To offset this, some companies have reduced or eliminated the traditional 8% threshold and increased their share of capital gains above the historical level of 20%, preserving executive pay even as returns shrink.
The sector’s profit engine has shifted from investment returns to capital accumulation. Large managers are now channeling more capital into scalable, lower-return strategies such as private credit and infrastructure. For example, Apollo manages about $700 billion in private credit, compared to $150 billion in PE. In other words, fund managers prioritize their own profitability over the profitability of their clients. Management and advisory fees at Blackstone have exceeded performance fees in seven of the past 10 fiscal years, a pattern reflected across the industry.
Not surprisingly, the recent 401(k) products that private equity firms are offering to retail investors follow the same model, emphasizing predictable credit and real estate exposures rather than potentially higher returns, but more competitive PE and VC.[9] As competition for deals increases, scale (not performance) has become the more reliable path to profitability.[10] And alternative asset managers’ focus on fundraising, even if this means moving away from their core competency.[11]
Coverage invites courage
Private equity firms are eager to grow assets under management and are actively lobbying governments and lawmakers to further deregulate.[12] This is a risky proposition.
In the market euphoria that preceded the global financial crisis, private markets were the subject of numerous cases of alleged corruption and collusion, with regulators imposing heavy fines on some of the largest PE groups.[13]
In addition to the risk of fraudulent and questionable activity, the illiquid and opaque nature of private markets makes it difficult for investors to assess the competence of individual fund managers. In Britain, for example, Neil Woodford, a veteran public equity asset manager, proved to be a poor allocator of funds across asset classes in the private market.[14] Many of its PE and venture capital holdings underperformed, leading to the collapse of Woodford Equity Income in 2019 after that investment vehicle lost more than £5 billion in value.
What should further concern potential retail investors is the pervasiveness of agency problems in private markets. Asset management trading is mainly focused on the controls of the fund manager[15] and economics[16].
This default modus operandi, coupled with the lack of accountability and poor supervision, contributes to a lopsided outcome in favor of the fund manager.
Institutional failure
Institutional limited partners (LPs) accept many of the inefficiencies of the private markets because they also manage other people’s money. Pension funds, insurers and endowment funds charge their own fees and often benefit from the same cost layers (via multiple cost layers)[17] thereby inflating fund managers’ revenues. As a result, few institutional investors are motivated to curb these practices.
The supervisory mechanisms are also weak. Replacing an underperforming or unethical general partner (GP) typically requires the approval of 75% of investors – a high threshold that most managers reach.
Meanwhile, the personal and professional ties between LP managers and PE firms further blur accountability. Many senior LP representatives sit on advisory boards or attend networking events hosted by the GPs they are charged with overseeing, creating subtle but powerful conflicts of interest.
In theory, LP investors should hold private equity fund managers to the same fiduciary standards that the latter apply to their portfolio companies. In practice, the balance of power is heavily tilted towards fund managers, a structural flaw that perpetuates weak governance and limited investor protection.
If you’re too small to play, stay away
Institutional investors have woken up to their lack of influence in curbing the worst behavior of fund managers and have become more aware of the excessive compensation these fund managers receive in relation to their actual performance.
Some of the larger LP investors – including pension fund managers such as BlackRock and Canada Pension Plan, Singaporean sovereign wealth fund GIC and Australian bank Macquarie – have scaled back their commitments to external fund managers, opting to set up in-house alternative asset management departments.
In turn, private equity fund managers have sought other sources of financing. The largest obtain perpetual capital from their own insurance vehicles.[18] It eliminates the need to regularly go to the market to raise new funds. But perpetual capital pools are just one source of easy money.
Taking the retail route is another valuable avenue. One that is less demanding than institutional LPs. No retail investor could request an observer seat on the advisory board of a private equity firm. No one would ever gain enough influence to question the level of the committees. No one will have the resources to monitor or investigate a fund manager’s investment decisions. They will be forced to rely on brokers and other intermediaries, piling up even more commissions and agency problems.
Retail investors are likely to be even more accommodating than institutions when faced with an increase in carried rates or the removal of hurdles. In short, they offer all the benefits of institutional money without many of the inconveniences.
As a recent PitchBook report stated on the possibility of committing to private markets, “For some allocators, the added complexity and illiquidity will be justified by diversification and alpha potential; for others, remaining in public markets may prove to be the most appropriate path.”[19]
Until private capital faces stronger scrutiny and better terms in terms of compensation and capital gains allocation, and until there are more liquid secondary markets, private investors would be better off staying in the public markets.
[1] https://www.businessinsider.com/trump-private-equity-retirement-plan-risk-401k-retail-investor-warning-2025-7
[2] https://global.morningstar.com/en-gb/funds/private-market-investing-what-is-long-term-asset-fund
[3] https://www.efama.org/policy/eu-fund-regulation/european-long-term-investment-fund-eltif
[4] https://blogs.cfainstitute.org/investor/2021/01/13/myths-of-private-equity-performance-part-iv/
[5] https://blogs.cfainstitute.org/investor/2024/03/01/venture-capital-lessons-from-the-dot-com-days/
[6] https://www.caisgroup.com/articles/the-evolution-of-the-private-equity-secondary-market
[7] https://www.privatecapitalsolutions.com/insights/unpacking-private-credit-secondaries
[8] https://blogs.cfainstitute.org/investor/2022/02/09/private-equity-market-saturation-spawns-runaway-dealmaking/
[9] https://pitchbook.com/news/reports/q4-2025-pitchbook-analyst-note-the-new-face-of-private-markets-in-your-401k
[10] https://blogs.cfainstitute.org/investor/2022/09/15/new-breed-of-private-capital-firms-will-face-performance-headwinds/
[11] https://blogs.cfainstitute.org/investor/2022/09/15/new-breed-of-private-capital-firms-will-face-performance-headwinds/
[12] https://www.ft.com/content/221e5dd4-6d99-48fb-af4d-4326fe61c37a
[13] https://www.amazon.com/Good-Bad-Ugly-Private-Equity/dp/1727666216/
[14] https://www.ft.com/content/e9372527-1c88-4905-86f4-3b8978fd2baa
[15] https://blogs.cfainstitute.org/investor/2022/05/17/the-private-capital-wealth-equation-part-1-the-controls-variable/
[16] https://blogs.cfainstitute.org/investor/2022/06/15/the-private-capital-wealth-equation-part-2-the-economics-variable/
[17] https://blogs.cfainstitute.org/investor/2023/02/23/agency-capitalism-in-private-markets-who-watches-the-agents/
[18] https://blogs.cfainstitute.org/investor/2021/06/01/permanent-capital-the-holy-grail-of-private-markets/
[19] https://pitchbook.com/news/reports/q4-2025-allocator-solutions-are-private-markets-worth-it
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