The Problem with Private Markets
The Rational Reminder Podcast Podcast Recap
Published:
Guests: Ludo Falipu, Larry Swedroe
What Happened
Private markets, often touted as being more stable and offering higher returns than public markets, have faced significant challenges. In 2026, private equity funds struggled to sell holdings, and real estate funds gated or locked up investor funds, exposing the risks inherent in these investments.
The podcast discusses how private market investments are being pushed onto retail investors despite their complexity and high fees. The Ontario Securities Commission is under pressure to authorize mutual funds containing higher-risk private assets for retail investors, who are seen as a potential source of liquidity for these markets.
Private equity, a significant component of private markets, involves investing in private companies to increase their value before exiting at a profit. However, real returns from private equity, net of fees, can often be replicated by public stocks with similar characteristics, challenging the claimed superior performance of private equity.
The podcast highlights that private market investments gained traction post-2008 financial crisis as a response to public market volatility. However, the perceived stability from less frequent pricing and illiquidity masks the true risks and volatility, leading to concerns about investor sentiment and panic selling.
The episode notes the dispersion in private equity fund returns, where massive differences in outcomes pose risks for those choosing the wrong funds. Ludo Falipu's research suggests that any outperformance by private equity disappears when consistent benchmarks are applied, questioning the existence of an illiquidity premium.
The hosts discuss how some Ivy League endowments are reducing their exposure to private markets, reflecting skepticism about future returns. Despite claims of decreased fees in private markets, the economic realities of manager skill mean that lower fees do not necessarily result in increased returns for investors.
Private credit funds, akin to private equity, display risky characteristics and face redemption issues. The true market value of private credit loans is reflected in publicly listed business development companies, which offer more transparency compared to private credit funds.
Larry Swedroe, a proponent of private assets, argues for their inclusion in portfolios, suggesting that private assets can be more tax-efficient. However, the debate continues on whether private markets genuinely offer higher returns with less risk compared to public markets.
Key Insights
- Private markets, marketed as offering higher returns with less risk, faced significant challenges in 2026, with private equity funds struggling to sell holdings and real estate funds gating investments.
- Retail investors are increasingly targeted for private market investments due to their perceived potential as a liquidity source, despite the complexity and high fees associated with these investments.
- Research by Ludo Falipu suggests private equity's perceived outperformance over public markets largely disappears when consistent benchmarks are applied, questioning the existence of an illiquidity premium.
- Despite claims of decreased fees in private markets, the economics of manager skill imply that such fee reductions do not necessarily translate into higher returns for investors.