The Growing Risks of Retail Access to Private Markets

The private market landscape has long been the domain of institutional investors and high-net-worth individuals. However, recent years have seen a seismic shift: the so-called "democratization" of private equity and alternative assets has opened these markets to a broader audience, including individual investors. While this expansion promises diversification and access to high-growth opportunities, it also introduces a host of risks that are particularly acute for retail participants. Illiquidity, opaque valuations, and misaligned incentives collectively create a volatile environment where individual investors are often at a disadvantage.

Illiquidity: A Double-Edged Sword

Private market investments, such as private equity, real-estate funds, and venture capital, typically require long-term commitments with limited or no redemption options. For example, the collapse of platforms like Linqto and the financial strain on the Bluerock Real Estate Fund in 2025 highlighted how liquidity mismatches can leave individual investors stranded when capital is needed unexpectedly. Unlike public markets, where assets can be sold quickly, private assets are often illiquid by design. This illiquidity is compounded by the rise of ETF wrappers and retirement plan access, which mask the underlying illiquid nature of these investments. As a Stanford Graduate School of Business analysis notes, this structural mismatch creates a "systemic risk machine," where daily liquidity expectations clash with the reality of locked-up capital.

Opaque Valuations: A Fog of Uncertainty

Valuing private assets is inherently challenging. Unlike public equities, which trade transparently, private assets rely on sponsor-determined valuations that can lag behind real market conditions. During periods of economic volatility, such as the 2025 market corrections, these valuations often fail to reflect true asset worth, leaving investors with inflated or deflated expectations. For instance, the Bluerock Real Estate Fund's struggles underscored how opaque net asset value (NAV) calculations can obscure underlying risks until it's too late. Retail investors, lacking the analytical tools to scrutinize these valuations, are particularly vulnerable. As one expert warns, the lack of transparency means investors are "often left relying on sponsor valuations and complex financial structures" without the expertise to verify them.

Misaligned Incentives: Profiting from Illiquidity

The fee structures of private market funds further exacerbate risks for individual investors. Most private equity funds charge a 2% annual management fee and a 20% performance fee (carry), often calculated on committed rather than invested capital. This creates a perverse incentive for fund managers to prioritize capital raising over delivering returns. For example, firms like Blackstone and Apollo have shifted toward scalable, lower-return strategies such as private credit and infrastructure, prioritizing asset accumulation over performance.

Compounding this issue are practices like secondary market markups, where funds purchase stakes at a discount and immediately revalue them to NAV, creating artificial gains. These tactics allow managers to charge carry fees on unrealized gains, effectively profiting from valuation assumptions rather than actual economic performance. Retail investors, with limited oversight and governance influence, are especially exposed to these conflicts of interest. As a CFA Institute report notes, the combination of high fees, illiquidity, and opaque practices makes private markets a "complex and potentially risky investment" for those without robust due diligence resources.

Conclusion: A Call for Caution

The democratization of private markets has lowered barriers for individual investors, but it has also amplified systemic risks. Illiquidity traps capital, opaque valuations obscure true performance, and fee structures favor managers over investors. These challenges are not merely theoretical-they have already manifested in real-world crises like the Linqto and Bluerock incidents. For individual investors, the lesson is clear: private markets require a level of expertise, patience, and risk tolerance that many retail participants lack. As regulatory scrutiny intensifies, it remains to be seen whether the industry will adapt to protect smaller investors or continue prioritizing growth over accountability.