private markets for retail investors: key things to consider

​While the theoretical case for private markets can look compelling, the practical realities are more complex and not without pitfalls.

There are some key issues investors need to consider, in our view, are: 1) illiquidity, 2) opacity and 3) fees and misaligned incentives.
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We explore each of these in turn.

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An introduction to private markets

​​Private markets—encompassing unlisted private equity, private debt, property and infrastructure—have long been championed by institutional investors for their potential to deliver both superior returns and diversification. The so-called “Swensen model,” pioneered by David Swensen at Yale University, advocated for significant allocations (up to 40%) to alternative assets including private markets, citing their long-term return potential and access to unique, non-public opportunities.
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However, as the financial industry increasingly seeks to broaden access to private markets for retail investors, it is essential to consider the risks and structural challenges that accompany illiquid investments. ​

Illiquidity: a one-way street

Private market funds are inherently illiquid. For some, that’s their appeal.  “The illiquidity premium” should in theory deliver a superior return over time.  Investors are typically locked in for 5 to 10 years, with no ability to redeem their capital early. This can be fine in the theoretical long-run, but can be financially damaging if liquidity is needed unexpectedly. Moreover, many private funds include capital call provisions, requiring investors to commit additional funds over time. This structure can feel like a financial one-way street: easy to enter, but difficult and costly to exit.
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This illiquidity makes private market allocation decisions “structurally hard to reverse,” unlike most other investments that can be sold at short notice.

Opacity: infrequent valuations and “volatility laundering”

Unlike public equities, which are priced continuously by the market, private market assets are valued infrequently—often quarterly or annually—by internal models or accountants. This creates a significant opacity problem. The reported Net Asset Value (NAV) may not reflect the true market value, especially in the absence of recent transactions.

Professor Andrew Ang, in his book Asset Management: A Systematic Approach to Factor Investing, highlights that reported returns for illiquid assets are often “too good to be true,” due to survivorship bias, infrequent valuation, and selection bias. He warns that these distortions can mislead investors into underestimating the true risk of private market investments.
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There is also the phenomenon of “volatility laundering,” which occurs because infrequent pricing smooths out the appearance of volatility, making these assets seem less risky than they are in reality.

High fees and misaligned incentives

Private market funds typically charge significantly higher fees than public market equivalents—for example 2% annually plus a performance fee (known as “carried interest” or “carry” which is treated as a capital gain).  Fees can be charged on committed capital, not just invested capital, and base fees are collected regardless of performance.
This creates a misalignment of incentives. Fund managers are incentivised to raise and deploy capital, not necessarily to deploy it wisely, or return it to investors in the absence of any attractive deals.  Whereas buying a fund requires a read of the KID and a Factsheet, participating in a private markets programme, required a careful reading and understanding of contractual arrangements that are inherently complex and often can embed potential conflicts of interest related to misaligned incentives.

Retail investors’ opportunity or institutional investors’ exit?

The merits of private market investing are being promoted not just to institutional investors, but increasingly to retail investors too.
Long-Term Asset Funds (LTAFs) are being created to provide retail investors with access to private markets programmes.

Whilst for some this could be a tremendous opportunity, for others – a more cynical view is that an inflow of retail investor money – including potentially mandatory allocations from UK pension schemes under the Mansion House Accords – will provide institutional private market investors the opportunity of an exit in the absence of an IPO for their underlying holdings or robust secondary market for their fund.

The challenge is that the dispersion is so high between good and bad private market fund returns, that selectivity is key.  Being in the right fund in the right cohort with the right manager with the right portfolio of underlying investors is a skill in itself for the best resourced institutional asset owners.  For those investors, private markets could indeed be an exciting new addition to a portfolio.  But for others, it may just be an illiquid holding that fails to deliver returns either above the public equity mark or indeed cash.  But either way, it delivers great fees for the managers.

Our preference therefore is for liquid public markets, and the ability to adapt a portfolio and remain flexible.
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By looking at correlation structure between liquid asset classes, it is possible to construct a systematic, risk-based approach to diversification, without tying up capital in illiquid, opaque private market funds.

Conclusion: own the managers, not the funds

While private markets may offer compelling opportunities, they also come with significant structural risks—particularly for retail investors. The combination of illiquidity, opaque valuations, high fees and potential conflicts of interest makes them a complex and potentially challenging investment for institutional and retail investors alike.

As Professor Ang and others have shown, the theoretical benefits of private markets can often fail to materialise in practice, especially when compared to the transparent, liquid, and low-cost alternatives available in public markets.

In the 2008 Financial Crisis and again in 2025, Harvard has been a forced seller of some of its private market holdings owing to unexpected liquidity needs.  Their time horizon for private market holdings proved to be shorter than they thought in theory.

For retail investors, the promise of private markets should be approached with caution and a clear understanding of the risks involved. In many cases, the best course of action may be to stay liquid, stay transparent, and stay diversified.
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We do however recognise there is a structural shift of assets to private markets, but we would rather access that theme by owning the listed shares of the private market managers who receive the fee income from illiquid funds, rather than the illiquid funds themselves.  This can be done in a straightforward, low cost, and, most importantly, liquid way using Private Market Managers ETFs.