Fixing the unnecessary exclusivity of private funds.
In the financial management industry today, investments in private markets—such as Private Equity, Venture Capital, Private Credit, Real Estate, and Hedge Funds—are generally viewed as high-risk. They’re often grouped as part of “Alternative Investments” that include ventures like oil discovery projects, fine art, classic car purchases, or cryptocurrency tokens. This categorization leads many financial advisors to recommend these options only for Ultra High Net Worth individuals and Billionaires; clients that have more money to work with and can stomach a higher level of risk.
Yet, despite this commonly held notion, there’s nothing inherently riskier about many of the assets within private markets than there is in public funds. Like any other investment, the level of risk varies greatly across different asset classes, from the high-risk gamble of early-stage venture capital to the much more predictable income of real estate.
The Problem.
In reality, the perceived risk of many private market investments arises not from the assets themselves but from the way private market funds are structured and operated. Unlike public market funds that follow strict reporting and operational processes, private markets are the Wild West. These funds tend to be opaque, illiquid, and require substantial minimum capital investments. As a result, the inability to properly assess these investments before committing, and then being unable to easily reverse your investment decision, elevates the risk substantially. This is especially true for investors with lower overall net worths, who must lock up a higher proportional amount of their capital to gain access to these funds, regardless of the underlying assets or strategy.
Take, for example, a conservative private credit fund that invests only in top-tier companies with outstanding management teams; in theory, this isn’t a particularly high-risk investment. However, if the minimum investment is $1 million, the capital is locked up for eight years, and your only insights come from lightweight, fund-level reports with stale data, then what should be a low-risk investment suddenly resembles a gambling decision. If one has a billion dollars, this isn’t a problem; if one only has $5 million, it is.
This situation is problematic. Private markets present excellent investment opportunities with a diverse array of unique asset classes that typically balance out investments in traditional markets. Yet, as long as these funds remain out of reach for most investors, the benefits accrue exclusively to the ultra-wealthy, exacerbating global wealth disparity (which to some degree has been directly fueled by this disparity in access). What’s more, the trend of private funds increasingly taking over larger sections of our economy and keeping high-performing companies and projects private not only prevents mass affluent and High Net Worth investors from accessing these funds (not to mention the retail investor cohort) but also progressively restricts their access to a broader range of opportunities.
How do we fix it?
Short of physically storming the offices of America’s private investment firms, we have one clear path forward: mitigate unnecessary operational risk in private funds. To put it plainly, we need to make private funds more transparent, more liquid, and more accessible because there are no fundamental reasons why they shouldn’t be.
Managers will argue that secrecy is important to retain an edge over the competition and will push back on the idea of tradability as a solution for liquidity because of a desire to maintain a personal relationship with their investors. But the fact is that, in an era of increasing transparency and financial democracy, the few status-quo arguments are just not strong enough to counterbalance the benefits of open and accessible private markets.
Open and tradable private markets are more efficient, both in terms of free trade and pricing. They are better for market competition, both between funds and on an asset level. They also reduce the chances of fraud or insider trading, which frequently occurs between existing fund managers, and they allow the greatest possibility for wealth generation to be distributed to the largest number of people. Except for a small, established group of very wealthy fund managers, open and efficient private markets are better for just about everyone.
What steps can we take?
Firstly, private funds must embrace real-time transparency and fully disclose all crucial asset inflows, outflows, and cash balances. They already have this information; they just need to share it. Ideally, this data wouldn’t be limited to direct investors but shared publicly, fostering external analysis and discussion, much like the Wall Street analyses we see for public companies.
Furthermore, liquidity in private funds needs to be liberalized by eliminating unnecessary restrictions on share transfers. There’s no valid reason to prevent investors from trading their shares with eager buyers. It does not affect the fund withdrawal models; in fact, it helps. In a world where investors can simply trade away fund shares, lock-up periods on funds can be longer or even removed entirely, essentially making private funds closed-ended. Managers might argue that trading will affect the price of the fund shares and could harm investors. But we already see this in practice with Exchange Traded Funds, and it works just fine.
Current policies that heavily restrict or completely block share transfers do nothing but artificially inflate share prices and remove investors’ ability to vote with their wallets on the performance of fund managers. As it stands, once you’re in, you’re stuck, and the only one who benefits from this setup is the manager.
Note: I will pass some of the blame to the SEC here. Regulations on access and performance fees have exacerbated this problem. God forbid we just let investors make decisions for themselves, right, Mr. Gensler?
Finally, we need to lower buy-in minimums. Managers often cite per-investor expenses like KYC and tax, but this is a straw man argument at best. These costs are negligible and trending downwards. Existing investment platforms that work under Regulation CF, such as Fundrise and Titan, have already reduced buy-ins to a few hundred dollars.
The fact is, minimums are a cultural issue, not a cost one. Fund managers continue to enforce these elite gatekeeping practices mostly for their own benefit and to feed their egos. Managers want to be selective about their investors because they don’t want to deal with the general public. This, in turn, perpetuates a “cult of manager” attitude that does nothing to serve the fund investors.
The Result.
By tackling these pivotal issues, the private funds industry can progress towards a more just and effective framework that genuinely earns investor trust and expands access. This transformation would realign private markets with contemporary financial values, where transparency, choice, and equitable access are fundamental requirements for a prosperous investment environment, protecting them from growing public resentment.
Enhancing transparency, increasing liquidity, and lowering entry barriers will make the private funds industry more efficient. Successful funds would be backed by solid data, open for scrutiny and discussion across the investment community. This transparency will open the doors to diverse and exciting asset classes for a broader range of investors, growing the industry and moving society towards greater economic equality.
This vision, while ambitious, is grounded in historical precedent. Reflect on the transformation from the 1950s, when stock analysis relied on hefty paper-based investor books, to today’s era where the same data can be downloaded for free from Yahoo Finance.. The market trajectory has consistently moved towards more transparency, more choices, and reduced costs, spurred by technological progress. While private fund managers currently maintain their exclusivity, one must wonder about the sustainability of such practices.
With the continued push of technology, like our own Medici Project, alongside evolving norms and potential regulatory interventions, it’s only a matter of time before private markets become as accessible as their public counterparts. So, we might as well get started now.
Comments