Investors and the democratization of private equity

Private equity has historically been the playground of institutional investors, pensions, endowments and accredited investors — a group that includes high-net-worth and ultra-high-net-worth individuals, banks, financial firms and trusts. These investors are usually deemed financially sophisticated, capable of handling the risks and illiquidity inherent in long-term private market investments.

However, a recent push by the Securities and Exchange Commission to broaden the definition of an “accredited investor” has opened the door for retail investors to access PE.

This shift raises important questions: Are retail investors adequately prepared to take on the complexities and risks that come with investing in private equity? Do they understand that they may simply be targeted to fill capacity, often receiving fewer desirable opportunities compared to institutional players? 

The allure of private equity is considerable. A 2024 analysis from Bain & Company projects that private market assets will grow at more than twice the rate of public assets, reaching $60 trillion to $65 trillion globally by 2032. This explosive growth has understandably sparked a wave of interest among retail investors, many of whom are drawn to the promise of diversification and higher returns, especially after the volatility of traditional markets that occurred in 2022. 

However, the democratization of private equity comes with significant caveats.

Retail investors are often seen as a source of capacity for PE firms, providing capital that more sophisticated institutional investors may shun. These opportunities, frequently offered through vehicles like interval funds, are structured to mimic traditional mutual funds but with limited liquidity — often allowing withdrawals only quarterly, sometimes capping or suspending them entirely. While these structures may offer access to private markets, they often lack the exclusivity and prime opportunities reserved for institutional investors. 

Moreover, retail investors may find it challenging to navigate the full range of complexities that can accompany investment in private equity. Unlike public markets, private equity often operates in an opaque environment, with no requirement to disclose financials, operations or liabilities. This lack of transparency can leave retail investors in the dark about the true risks and performance of their investments.

Additionally, the illiquid nature of these non-correlated assets means investors may be prepared to wait years for an exit, with no guarantee of returns. What happens if a retail investor needs to liquidate their position during a market downturn? The options are limited, and the consequences can be severe.

The fear of missing out on alternative investments like private equity can be a powerful motivator, but it can also lead to poor decision-making. Retail investors may not fully appreciate the nuances of private equity, such as the higher fees, longer lock-up periods and limited liquidity. They may also underestimate the risks associated with investing in an industry that thrives on exclusivity and general sophistication. 

While institutional investors typically have the resources to conduct thorough due diligence and the ability to negotiate favorable terms, retail investors often rely on intermediaries who may not have their best interests at heart. This dynamic can result in retail investors being offered lower-tier opportunities, such as co-investments, or funds-of-funds, which may not deliver the same returns as direct investments in top-tier private equity funds. 

Further, the lack of regulatory oversight in private equity means retail investors must rely on their own judgment and the credibility of the firms they invest in. This can be a tall order for individuals without deep expertise or experience in what has historically shown itself to be a complex and opaque industry. 

The democratization of private equity is a double-edged sword. While it offers retail investors access to an asset class previously reserved for the wealthy and institutional players, it also exposes them to significant risks and complexities. The truth about private equity is that it is not a one-size-fits-all solution. It requires patience, expertise and a high tolerance for risk — attributes that may not align with every retail investor’s profile or objectives. 

As the rush to private markets continues, maintaining a healthy skepticism is essential. Retail investors must ask themselves whether they are truly prepared for the complexities of private equity. Are they willing to accept the illiquidity, opacity and potential for lower-tier opportunities? Or are they being lured by the promise of higher returns without fully understanding the risks? 

Only time will tell how the democratization of private equity will play out. In the meantime, retail investors should approach PE opportunities with caution, seeking advice from trusted financial professionals while carefully weighing the potential rewards versus the risks.

Jonathan Foster is president and CEO at Angeles Wealth Management.