Private Equity Should Be Wary of Wooing Retail Investors

The Industry Risks Becoming Just Another Overregulated Public Market

Private equity (PE) firms are pushing for the democratisation of their asset class, aiming to open their doors to retail investors. The rationale is simple: PE has delivered strong historical returns—14.8% annualised for US-focused funds over 20 years (Preqin data)—and retail participation could unlock a vast new capital pool. Proponents argue this could help solve the retirement savings crisis, provide retail investors with superior returns, and enhance capital allocation efficiency across the economy.

Blackstone, for example, has already raised $6 billion for its Blackstone Private Equity Strategies Fund (BXPE), allowing high-net-worth individuals to gain exposure. Other firms, like KKR and Apollo, are following suit. But should retail investors really be part of this asset class? And more importantly, should private equity want them to be?

The Liquidity Mismatch: A Fundamental Problem

PE operates on long-term investment horizons, often 7–10 years, requiring capital to remain locked in. This structure is well-suited for institutional investors such as pension funds and endowments, which have long-term liabilities and do not require immediate liquidity. Retail investors, on the other hand, typically seek more flexibility, making liquidity a major challenge.

To address this, firms are experimenting with "evergreen" funds, offering periodic liquidity windows. Blackstone’s BXPE, for instance, caps redemptions at 3% of assets per quarter, limiting potential cash outflows. However, during financial downturns, retail investors tend to panic-sell, which could force PE funds to liquidate assets at depressed valuations, suppressing long-term returns and creating systemic risks.

We’ve seen this movie before. The 2008 financial crisis was exacerbated by fire sales of illiquid assets, as structured investment vehicles (SIVs) faced redemption pressures. If retail-focused PE funds experience similar stress, the broader private markets could face a liquidity shock, potentially triggering forced exits at distressed prices.

Regulatory Consequences: A Public Market in Disguise?

PE’s ability to generate superior returns is, in part, due to its flexibility and lack of public market-style oversight. However, increasing retail exposure will inevitably invite stricter regulation.

Currently, PE funds avoid Employee Retirement Income Security Act (ERISA) restrictions unless retirement plan investments exceed 25% of fund assets. If retail capital grows significantly, many funds will cross this threshold, making them subject to public-style governance, compliance burdens, and reporting requirements.

In the UK, regulators like the Financial Conduct Authority (FCA) are already ramping up scrutiny of private markets. The FCA recently conducted in-person visits to PE firms to assess risk management and governance—a sign that regulatory intervention is coming.

More transparency means more oversight. More oversight means higher compliance costs, reduced flexibility, and diminished returns. In essence, PE risks becoming just another heavily regulated public market, losing the very characteristics that made it attractive in the first place.

My Analysis: The Hidden Costs and Systemic Risks

In my view, the risks of retail participation far outweigh the benefits. Private equity thrives because it operates outside rigid regulatory frameworks, can take contrarian bets, and is insulated from public market pressures. Opening the doors to retail money fundamentally undermines this advantage.

1. Fee Structure Concerns:

   PE’s traditional 2-and-20 model (2% management fee + 20% performance fee) is already expensive for institutional investors. For retail investors, it becomes even more costly, significantly eroding net returns—especially when compared to lower-cost ETFs and mutual funds.

2. The Expertise Gap:

   Pension funds and endowments employ teams of analysts to evaluate risk-adjusted returns, leverage levels (often 60–70% debt-to-equity), and operational strategies. Retail investors lack this expertise, making them far more vulnerable to poor decision-making, misaligned expectations, and potential losses.

3. Moral Hazard & "Too Big to Fail" Risk:

   If retail-focused PE funds become a substantial part of the financial system, policymakers may feel obligated to step in during crises. This creates moral hazard, as PE firms may take greater risks knowing that government support could be available. If that happens, PE won’t be private anymore—it will be another regulated arm of the financial system, just like banks.

Conclusion: A Path Riddled with Pitfalls

Expanding retail participation in private equity sounds compelling in theory but is deeply flawed in practice. While the industry seeks to scale and tap into new capital pools, it risks sacrificing its agility, independence, and core strengths.

PE has always been about long-term, high-conviction investing, free from public market constraints. If firms chase retail capital too aggressively, they may unintentionally trigger regulatory consequences that erode the very essence of private markets.

The bottom line? Private equity should think twice before inviting retail investors into the fold. Some doors, once opened, can never be closed.