Op-ed: The democratization of private equity is a double-edged sword for retail investors

Private equity has traditionally been dominated by institutional investors, pensions, endowments, and accredited investors, including high-net-worth individuals and financial institutions. These investors are considered financially savvy and adept at managing the risks associated with long-term private market investments. However, a recent move by the Securities and Exchange Commission to expand the definition of an “accredited investor” has paved the way for retail investors to enter the realm of private equity.

This shift raises important questions about whether retail investors are equipped to handle the complexities and risks that come with investing in private equity. They need to understand that they may be targeted to fill capacity, potentially receiving fewer desirable opportunities compared to institutional investors.

The appeal of private equity is significant, with projections indicating that private market assets will outpace public assets in growth. This has sparked interest among retail investors seeking diversification and higher returns, especially following the market volatility of 2022. However, the democratization of private equity comes with challenges.

Retail investors are often viewed as a source of capital for private equity firms, offering opportunities that institutional investors may overlook. These opportunities, often provided through vehicles like interval funds, come with limited liquidity and may not offer the same advantages as those reserved for institutional players. Retail investors must navigate the complexities of private equity, which operates in an opaque environment with limited transparency on financials and performance.

The fear of missing out on private equity investments can lead to poor decision-making among retail investors who may not fully grasp the risks and nuances of the industry. They may face higher fees, longer lock-up periods, and limited liquidity. Without regulatory oversight, retail investors must rely on their own judgment and the credibility of the firms they invest in, which can be challenging for those lacking expertise in this complex industry.

While democratizing private equity offers retail investors access to an asset class previously out of reach, it also exposes them to significant risks and complexities. It requires patience, expertise, and a high risk tolerance, qualities that may not align with every retail investor’s profile. Proceeding with caution and seeking advice from financial professionals are crucial steps for retail investors considering entering the private equity space.