Inside Wall Street’s Private Equity Push

Touting a long history of high returns, Wall Street is pushing for everyday investors to gain access to unlisted, private investments. Proponents claim they want to benefit the masses by bringing this previously exclusive, lucrative option to 401(k)s and more, via revising rules governing retirement accounts and requirements governing private investments. But behind the scenes, we see another possible explanation for the push: Many private or hedge funds are facing a cash crunch. In our view, today’s liquidity issues highlight why investors should think twice before diving into private equity if it becomes more accessible—and are reminders of everlasting considerations investors must weigh in approaching these options.

Recently, private equity returns have cooled significantly, lagging broader markets and driving funding issues. For context, these funds boasted flashy returns for decades, often leveraging up big and making concentrated investments. From 2000 – 2023, some estimates put their net annualized returns at 13%, topping public equity’s roughly 8% over that span.^[i] But they aren’t assured to outperform. By many accounts, global stocks outperformed private equity from 2022 to 2024—the first time since the dot-com bubble.^[ii]

Today’s lower returns are tied to several factors. Some blame slower dealmaking and initial public offering (IPO) activity. Others cite broad writedowns of stakes taken in 2021, before trouble in Silicon Valley’s private markets came to a head.^[iii] Costlier credit can play a role, too, raising funds’ interest expenses. And given unlisted assets’ opaque nature, these factors—along with broader economic uncertainty, inflation and geopolitical conflict—are making it tricky for buyers and sellers to agree on valuations for these unpriced assets. This may be particularly true in funds that invest in commercial real estate—but it isn’t limited to that.

As a result, some big investors appear to be losing confidence in private assets, bringing liquidity issues to the surface. Private equity fundraising fell a whopping -35% y/y in the three months to March.^[iv] Similarly, both the number and value of exits (when underlying investments are sold, presumably for profit) hit a two-year low in Q1 2025, as hesitant sellers sought to wait out potential valuation hits.^[v] Further reports suggest some firms are even turning to “continuation vehicles,” or opening up new funds by selling slices of their company stakes to themselves.^[vi] These trends hint at a potential, and considerable, liquidity crunch.

Meanwhile, Wall Street is pushing the federal government to allow more retail investor access to private investments via a menagerie of different avenues. Their efforts include things like redefining “accredited investor” rules and allowing private investments in 401(k)s, as well as increasing offerings of private equity in mutual funds and exchange-traded funds.^[vii]

Today, the SEC automatically grants accredited investor status to those with a net worth exceeding $1 million (excluding primary residence), an income exceeding $200,000 individually or $300,000 jointly with a spouse/partner in the past two years, or certain securities licenses or certifications. The idea here is to ensure investors have sufficient experience or knowledge to assess an unregistered asset.

Fair enough. But a problematic point? Those dollar thresholds aren’t inflation adjusted or indexed to public market capitalization or anything to that effect. Hence, the SEC estimates 24.3 million US households—18.5% of total American households—qualified at 2022’s yearend, 8 million more than in 2019.^[viii] As inflation and returns dragged more households into the private equity realm, it created more of a perception of an arbitrary threshold. Meanwhile, the rules outlined in 1974’s Employee Retirement Income Security Act (ERISA) have made it pretty tricky for 401(k) providers to offer funds with private equity.

We have no idea what the feds will ultimately do here regulation-wise. But in our view, today’s issues show why investors might think twice before diving in if these measures are eventually approved. If the industry’s biggest investors are hesitating to commit more capital to a category they have known for years, we suspect that should give retail investors pause—a chance to reconsider and ask some hard questions. Plus, increasing investor access to private markets doesn’t suddenly eliminate the chief headwinds currently weighing on returns—things like higher interest rates or asset valuation troubles are completely disconnected. So there is a considerable timing issue, especially if larger institutions continue to cash out for a variety of reasons. Just this week, a Moody’s report warned, “Some of the investments ‘funneled’ into retail funds may be leftover investments from funds previously sold to institutional investors who wanted to get out. ‘That raises questions about alignment, transparency and product integrity.’”^[ix]

Those are all things to consider in the here and now, but there are other questions to weigh in approaching the space. For one, private assets have long lacked transparency in valuation and performance. For example, unlisted investments are often marketed as stable, which just isn’t true. Because many private funds report valuations at set intervals (i.e., quarterly, semiannually), it can give the illusion of stability. But there is no way to track up-to-date performance—valuations could fluctuate wildly without investors knowing. This is actually illiquidity—a risk, not the absence of one. Moody’s report also notes retail-friendly private funds may have to trade more frequently and up their disclosures, reducing the perceived “illiquidity premium” of higher returns than public assets.^[x]

On top of this, many funds market their offerings using internal rate of return (IRR), touting figures above 20% or even 30% annualized. But this isn’t an actual return. IRR is a theoretical return over time, factoring in estimated cash flows and costs. From an investing standpoint, this isn’t an accurate reflection of what you would actually reap in the long run. A recent Financial Times column showed this quite well, noting, “The Internal Rate of Return is a powerful tool — but it’s not a rate of return. It is a mathematical artefact. It assumes every dollar distributed is reinvested at the same rate it was earned. It’s not realistic, not additive, not comparable to market indices — and not designed to be used the way the industry uses it.”^[xi] It went on to prove this by showing several examples including the Yale endowment’s private equity, which would be comically larger if the IRR were actual returns compounded over time. In Yale’s case, “At a 36 per cent annual net return since 1990, its PE portfolio alone would be worth $5tn (the whole endowment is actually $41bn).”^[xii] The SEC has even recently bolstered its marketing guidance to combat this.^[xiii]

Now, some in the industry are quick to note that IRR isn't an actual return on investment. But that is easily lost in translation to many accredited investors. What happens if we cast an even wider net? Or fold them into funds?

Also, while many institutions have nearly indefinite time horizons—making commitment to an illiquid asset class less of a hurdle—individual investors can’t say the same, in most cases. Most long-term investors will need to tap their portfolios eventually, whether it be for cash flow, funding a loved one’s education, a big ticket purchase or what have you.

Hence, private investments’ long lockup periods can create cash flow issues. What if a big expense pops up, but your private equity holdings aren’t redeeming? You may have to look at selling other parts of your portfolio, ceding some control of your asset allocation as a result. Since your asset allocation should be tailored to your investing goals and objectives, being forced off course is a danger.

Of course, private equity ETFs aim to solve this issue. These are relatively new products, so we will have to wait and see how they hold up in public markets. But the inherent liquidity gap—between the ETF and its underlying securities—could present redemption issues. For instance, ETF redemption requests exceeding cash on hand could mean redemption gates, a la UK institutional property funds post-Brexit.^[xiv] Transparency issues exist here, too. While private equity ETFs are publicly listed with live pricing, there could be disconnects with valuations since the underlying securities still report in intervals.

That said, talk of policy change isn’t policy change. And perhaps private equity sees sunnier days soon. But if these measures begin taking shape, we would keep these issues front of mind before getting drawn by the allure of exclusivity and lofty returns.