The push to offer private market products to retail investors often coincides with the end of a bull market cycle. It's a signal that institutional "smart money" is looking to offload positions and transfer risk to a less sophisticated buyer base.
Private assets appear deceptively stable because they are valued infrequently and subjectively, not because they are inherently less risky. This practice, termed 'volatility laundering,' masks true risk by smoothing returns on paper, a critical flaw for investors assessing portfolio diversification and risk-adjusted returns.
Certain private asset funds, like non-traded closed-end funds and interval funds, are structured like 'roach motels' where money can easily go in but is extremely difficult to get out. This design serves the manager by providing permanent capital but creates significant liquidity risk for the investor.
Managers of closed-end funds are often indifferent to their funds trading at a significant discount to Net Asset Value (NAV). They are paid on NAV and the structure provides permanent capital with no redemption pressure, creating a principal-agent problem where the manager's interests diverge from the investor's.
Despite the allure of high returns, the median private equity fund does not beat public market benchmarks like the S&P 500 after accounting for high fees and illiquidity. Only the top decile or quartile of funds deliver the outperformance that justifies the associated risks and costs, making manager selection paramount.
To overcome investor skepticism, Bill Ackman's Pershing Square fund (PSUS) used a 'combo platter' structure. It gives investors shares in both the fund itself (as a limited partner, LP) and the management company (as a general partner, GP), creating a clever alignment of interests not typically seen in retail-facing products.