Private equity may be our No. 1 economic boogeyman. It is blamed for rising real estate prices, poor medical care, and ruining many of the businesses we used to love. And yet it is also being mainstreamed as an asset class, with most everyone seemingly wanting a piece of the $7 trillion or so market that touches many of the goods and services we consume. The lure only grew stronger during the initial public offering of SpaceX, which valued the company at $1.8 trillion and handed unimaginable wealth to private equity investors.
Although it’s been said before, it’s worth repeating: None of that means private equity should touch our portfolios despite the government’s increasing efforts to add so-called alternative investments to the retirement accounts of Americans.
Private equity, which pools capital from institutions and wealthy individuals and deploys the money in non-public companies, plays an important role in the economy. It can be an invaluable source of financing for smaller firms looking to grow and bring better management practices to those that are troubled. It can even help make housing more affordable.
Major asset managers consider private equity a normal part of a diversified portfolio, perhaps too normal. Hedge fund Verdad Advisors points out that it accounted for 41% of Harvard University’s investment portfolio in 2025 while public stocks made up just 14%. BNY Wealth says it is common for large family fortunes to have more money invested in private than public markets. In 2024, about 14% of state and municipal pension portfolios were in private assets.
To Verdad founder Dan Rasmussen, this shows that private equity has become as mainstream as stock of blue chip International Businesses Machines Inc. Rasmussen, though, is no cheerleader. He believes private equity is “not appropriately sized” within portfolios. It’s too risky for major institutions like Harvard or pension funds that serve retirees to have such large allocations to private equity when it’s less than 5% of the size of the global public equity market:
If your wealth manager put 40% of your portfolio into India because he told you Indian equities (which have roughly the same market capitalization as private equity and better liquidity) would reliably outperform other equity markets, you’d probably ask some follow-up questions. India may or may not be a good investment, and you might or might not want to be overweight it, but even if you love India, putting 40% into that one trade would force you to forgo the benefits of diversification into other markets and crowd out a variety of other opportunities.
The case for private equity for all is that it offers access to the most exciting and fastest growing companies, like SpaceX or OpenAI. As these examples show, access to private equity has allowed companies to delay selling shares to the public, who are shut out from participating in what are often a firm’s biggest period of growth. If more of the best of corporate America remains private, the argument goes, then regulations that keep retail investors out of private assets seem a bit antiquated.
There is also a case to treat private equity like any other asset class, no different than, say commodities or real estate, because it offers more diversification and diversification is always good. And importantly for public pensions, private equity valuations are seemingly stable, unlike public equities that fluctuate daily.
There are problems with these arguments. For one, there is not much diversification value. Returns appear stable only because private equity is not traded on public markets. Over time, it correlates highly with public equity. And while the SpaceX IPO underscored the big wins for private equity, there have been big losses, which seemed to be mounting and this may be why more recently its performance has lagged behind public markets. As Bloomberg News reports, the $10 billion private equity firm SK Capital Partners has been rocked by a prolonged downturn in the chemicals industry. A fund is launched in 2019 posted an internal rate of return of negative 0.35% as of December.
Giving more investors access to private equity won’t fix these problems. It may even make them worse as an expanding pool of money competes for the few compelling investments. “Money has to get deployed immediately,” Bloomberg News quoted Monroe Capital LLC Chief Executive Officer Ted Koenig as saying last month at the annual SuperReturn conference in Berlin. “You’re going to see asset bubbles, and I think it’s going to be dangerous.” Regardless, retail investors won’t likely get access to the best funds, which don’t need their money.
Private equity isn’t all bad. It’s been a big part of America’s recent economic success and dynamism. But that does not mean it should be almost half of an institution’s endowment, let alone a standard share of a retail investors’ portfolio. I am not normally a supporter of excessive regulation, but the transparency of public markets and protections provided there by the Securities and Exchange Commission bolsters trust in the market, which is critical for less sophisticated investors.
Private equity already has an image problem and promulgating the notion of outsized returns that it doesn’t always deliver while charging high fees won’t help with the negative perception among many in the public. I am all for democratizing finance and giving more Americans a stake in our economy, but not when it comes to lightly regulated and opaque markets that offer little consumer protections.
As Rasmussen says, “there are no bad ideas in finance, only good ideas taken too far.” This describes what private markets have become to institutional investors and will only be truer as the market grows.
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