As regulators move to open private markets to a wider 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 challenge institutional participants. With fee structures built for scale and governance mechanisms that provide limited accountability, extending the model to smaller investors risks amplifying those weaknesses rather than democratizing opportunity.
New legislation seeks to grant retail investors universal access to private capital. In August, the Trump Administration issued an executive order entitled “Democratizing Access to Alternative Assets for 401(k) Investors.”[1]
European authorities are not to be outdone. The British government has 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 imposes no minimum.
While illiquid or so-called “semi-liquid” private markets are now accessible for most retail investors, participating without understanding their limits could prove costly.
Hazy Performance and Poor Liquidity
Assessing the true performance of private markets is difficult. Reported returns are often opaque and cannot be precisely benchmarked.[4] The illiquid nature of these investments compounds the problem. Although private capital funds are typically structured with 10-year maturities, few distribute capital on schedule.
A Palico analysis of 200 private equity (PE) funds found that more than 85% failed to return investors’ capital within that timeframe, and many successful venture funds take over a decade to reach a successful exit.[5]
Secondary markets offer limited relief. While investors can sell stakes, transactions are sporadic and frequently completed at a discount to net asset value. The scale is also tiny compared with public markets: secondary trading represents less than 5% of the primary market in PE,[6] and less than 1% in private credit.[7] Once committed, investors cannot easily exit, and pricing transparency is minimal.
The opacity endemic to private markets also raises a crucial question about performance. Whereas, on average, 1990s and early 2000s PE vintage funds did consistently deliver better returns than those of public markets, in the face of a massive inflow of capital allocated to the sector, outperformance has dwindled for recent vintages.
Overallocation led to market saturation in developed economies,[8] inflating asset valuations and making it harder for fund managers to derive any sustainable angle, consistently and persistently, to beat their peers or even public markets.
Performance Erosion
Market saturation has steadily lowered performance targets in PE. Typical internal rate of return (IRR) goals have declined from about 25% in 2000 to roughly 15% today. To offset this, some firms have reduced or removed the traditional 8% hurdle rate and raised their share of capital gains above the historical 20% level, ensuring manager compensation is maintained even as returns compress.
The industry’s profit engine has shifted from investment returns to asset accumulation. Large managers now channel more capital into scalable, lower-return strategies such as private credit and infrastructure. Apollo manages roughly $700 billion in private credit compared with $150 billion in PE, for instance. In other words, fund managers prioritize their own over their clients’ profitability. Management and advisory fees at Blackstone have exceeded performance fees in seven of the past 10 fiscal years, a pattern echoed across the sector.
Unsurprisingly, recent 401(k) products offered by private capital firms to retail investors follow the same model, emphasizing predictable credit and real estate exposures rather than potentially higher-return but more competitive PE and VC.[9] With competition for deals intensifying, scale — not performance — has become the more reliable path to profitability.[10] And the focus for alternative asset managers to fundraising, even if it means moving away from their core competency.[11]
Opacity Invites Audacity
Eager to grow assets under management, private capital firms are actively lobbying governments and legislators to deregulate further.[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 several of the largest PE groups.[13]
Beside the risk of fraudulent and questionable activity, private markets’ illiquid and opaque nature makes it hard for investors to gauge the competence of individual fund managers. In the UK, for instance, Neil Woodford, a seasoned asset manager in public equity, proved a poor allocator of funds across various private market asset classes.[14] Many of his PE and venture holdings underperformed, leading to the collapse of Woodford Equity Income in 2019, after that investment vehicle had lost over £5 billion in value.
What should concern prospective retail investors further is the pervasiveness of agency problems in private markets. The asset management trade is primarily focused on the fund manager’s controls[15] and economics[16].
This default modus operandi, coupled with the lack of accountability and deficient supervision, contributes to a skewed outcome in favor of the fund manager.
Institutional Failure
Institutional limited partners (LPs) accept many of private markets’ inefficiencies because they too manage other people’s money. Pension funds, insurers, and endowments charge their own fees and often benefit from the same layering of costs (via multiple layers of fees)[17] that inflates fund managers’ earnings. As a result, few institutional investors are motivated to curb those practices.
Oversight mechanisms are also weak. Replacing an underperforming or unethical general partner (GP) typically requires approval from 75% of investors – a high hurdle that leaves most managers entrenched.
Meanwhile, personal and professional ties between LP executives and PE firms further blur accountability. Many senior LP representatives sit on advisory boards or attend networking events hosted by the GPs they are meant to oversee, creating subtle but powerful conflicts of interest.
In theory, LP investors should hold private capital fund managers to the same fiduciary standards that the latter apply to their portfolio companies. In practice, the balance of power tilts heavily toward fund managers, a structural flaw that perpetuates weak governance and limited investor protection.
If Too Small to Play, Stay Away
Institutional investors have realized their lack of influence in reining in the worst behaviors of fund managers and become more aware of the excessive remuneration that these fund managers draw in relation to their actual performance.
Some of the larger LP investors — including pension fund managers like BlackRock and Canada Pension Plan, Singapore’s sovereign fund GIC, and Australian bank Macquarie — have scaled back commitments to external fund managers and chosen to build in-house alternative asset management divisions.
In turn, private capital fund managers have looked for other sources of funds. The largest ones derive perpetual capital from in-house insurance vehicles.[18] It eliminates the need to go to market regularly to raise fresh funds. But perpetual capital pools are only one provenance of easy money.
Taking the retail route is another valuable avenue. One less demanding than institutional LPs. No retail investor could request an observer seat on the advisory board of a private capital firm. None would ever get sufficient influence to challenge the level of commissions. None will have the wherewithal to monitor or investigate a fund manager’s investment decisions. They will be forced to rely on brokers and other intermediaries, piling on further commissions and agency problems.
Retail investors are likely to be even more accommodating than institutions when facing a hike in carried interest or the removal of hurdle rates. In short, they offer all the benefits of institutional money without many of the inconveniences.
As a recent report by PitchBook stated about the opportunity to commit to private markets: “For some allocators, the added complexity and illiquidity will be justified by diversification and alpha potential; for others, staying in public markets may prove the more appropriate path.”[19]
Until private capital faces stronger oversight and offers better terms as far as fees and capital gain allocation are concerned, as well as more liquid secondary markets, retail investors would be better served remaining in 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
