Jason Zweig said it perfectly:
“Wall Street is promoting a colossal lie[!]”
The White House has just allowed 401(k)s to invest in private equity.
On paper, it might sound like a no-brainer.
401(k)s have built-in protections. You can’t touch them until retirement age, and that lack of access is exactly why they’re often your best-performing asset. So in theory, you set it, forget it, and let compound interest (and the fund manager) do the work for you.
But in practice?
Let’s get into it:
First, I can’t believe it’s already been a year. So this post is long overdue.
Around this time last year, I hopped on Ask The Compound to discuss my experience as a younger financial advisor and, more importantly, investing in private markets.
I only had enough time to touch on this topic at a high level, but I wanted to tackle the question that is at the heart of the matter: Does having access to private investments help or hurt everyday investors?
Aside from wanting to feel like you’re part of an exclusive club or having something to impress your friends with at your kid’s birthday party, the truth is: for most investors, no.
For a while, I was in the fortuitous position of working across every tier of wealth management. From Liftoff, 1-on-1 financial planning with my clients, to our Multi-Family Office. Having a front-row seat at each level. I’ll explain why this is important later.
Now, let’s dive into what’s happening in the private investment industry today, why it attracts so many people, and who it’s actually right for.
What Are Private Investments?
At its core, a private investment is essentially anything not listed on an exchange like the NYSE, NASDAQ, or over-the-counter markets.
The private investment world is all around us, integrated into nearly every industry, often hidden in plain sight.
For instance, I don’t know how 6-year-old me missed this LBO line from one of my favorite childhood movies?
For those less familiar with this side of finance, here are the terms you need to know:
Private equity—which is a broad term in and of itself—is typically the first thing people think of, but as I mentioned in the video, private investments come in many different flavors: private credit, private real estate, real assets, and more.
Expectations vs. Reality
So that’s what it is—but why are people so seduced by private equity?
For starters, many believe these deals made behind closed doors offer higher return potential.
And although past performance is never the only way to judge an investment, it’s still a common reference point for many.
Hamilton Lane, an asset manager specializing in alternative markets, notes that “Private equity and private credit have outperformed global public equity and credit markets, respectively, in 21 of the last 22 years.” Plante Moran adds:
“Since the end of the year 2000, the global private equity index as measured by Preqin has delivered an annualized return of 10.5%, while a global public equity portfolio produced 7.0%, resulting in an average annual return premium of about 3.5%.”
Plante Moran: Private equity’s long-term performance can make it worth the risks
During the last decade or so, we artificially created an environment that has allowed private equity firms to borrow aggressively and deploy capital at scale. Coming out of the GFC, we were looking to spur really any kind of economic activity and growth; cue ZIRP. This was essentially the antithesis of where we are today. Meaning, today, cash and debt holders are being paid to park their money at banks, while back then, idle cash and debt investments were dead in the water. Ultra-low interest rates incentivize borrowing, and for PE firms, that meant go big or go home.
So, investors, searching for yield and unimpressed with the prospects of bonds, found private markets more appealing.
At the same time, public markets became increasingly dominated by mega-cap tech companies. Investors began seeking alternatives for diversification and potential upside.
Big-time investors were likely tapped out on public equity exposure, given there wasn’t much juice to squeeze out of an already saturated market.
The result? A tidal wave of capital flowed into private markets.
KKR predicts the alternative industry, as a whole, “to grow to more than $24 trillion in assets in 2028 from $15 trillion in 2022.” And by 2030, BlackRock expects private credit alone to more than double to $4.5 trillion.
This growing interest in private markets reflects their increasing popularity among a growing pool of investors.
NYT: Wall Street Wants to Make Private Markets a Little More Public
However, not all private investments are created equal.
As I mentioned in the ATC episode, I recommend keeping speculative or alternative investments like private equity to no more than 10-15% of your total portfolio.
Here’s why:
The Dark Side of Private Equity
Once you look past the returns sales pitch, a more complex picture emerges.
As the Chicago Booth Review points out:
“One of the main drawbacks of data from other sources is the lack of information on cash flows… Without those cash flows, it is not possible to compare the returns of private equity investing with the alternative of investing in the stock market.”
One reason you don’t hear about bad private deals is that it’s hard to get reliable data. Unlike public markets, where company performance is disclosed quarterly, private firms can operate in opacity.
Private investment firms aren’t required to publish returns, and many are protected by NDAs signed by investors, which keep details hidden even from those footing the bill. Just because private equity valuations aren’t updated as frequently as public stocks doesn’t mean they’re less volatile. It just means you may not see the hit right away.
Zweig writes, “In the real world, risk is the chance of losing money, which has nothing to do with how often prices are reported.”
We all dream of our investments multiplying tenfold, and we ride off into the sunset. But sometimes, the opposite happens. An initial investment can vanish in the blink of an eye, and you won’t always see the warning signs coming.
This is a major pain point right now.
These private equity firms are flush with cash—to the tune of $1 trillion—but are struggling to find the off-ramp for many of the investments made years ago. Many LPs want their money back, but exits are limited. Distributions are slowing. Liquidity events are fewer and farther between, especially with the IPO market cooling.
Goldman Sachs: Alternatives: Markets in Review
Today, fund managers are facing a tough exit environment. If you thought the housing market was bad, financing costs are still elevated, and valuations are steep. But instead of taking the loss or returning capital, most are finding creative ways to keep investors locked in—often through continuation vehicles or extensions—while continuing to collect management fees.
Those last 6 words are important.
On a fund level basis, you have no idea who or what is going to outperform. But despite what you/I/he/she says, if you believe the private equity feeding frenzy is going to accelerate as the KKRs and Blackstones of the world suggest, why not bet on the ones who will make money regardless of how their investments pan out?
Why make side bets on the groomsman who wore their second best suit to the blackjack table, who’s trying not to act surprised that he’s actually winning, when you can just own a piece of the Bellagio?
The always spot-on Downtown Josh Brown writes, “The data-driven conclusion is that investing directly in private equity CORPORATIONS as a shareholder over the last three years would have delivered 151% more than investing in the PE fund strategies themselves, with less fees, more liquidity, and far more dollars in your account.”
Everything is not for Everyone
Most casual watchers are probably familiar with Red Lobster, JOANN, Toys-R-Us, and what the industry has done to them.
But depending on your angle, the private equity industry is not all bad.
In the best cases, it can offer real value for business owners: liquidity, succession planning, and operational expertise. For entrepreneurs looking to scale or exit, PE firms are looked at as a strategic partner.
But they are often the ones receiving the payout. So, why are everyday investors still so captivated by it?
Part of it is the allure of exclusivity. But for many younger investors, it’s also about connection. They want to invest in things that hit closer to home—businesses they can see, touch, and believe in. A venture-backed startup feels more tangible than a broad index where 6% of your money ends up in Apple stock.
That’s understandable. I’d rather see my friends and peers make a boatload of money than Blackstone take in one more dollar. But critics have raised concerns about the shady nature of these markets. Specifically, the unintended consequences on workers, consumers, and communities.
Then you throw in the idea of including private equity in your retirement plan—the White House allowing private equity into 401k’s—and naturally you’d think we can all invest alongside the big dogs. We’re all going to be rich… right?
Not quite.
Opening the door to private equity could encourage investors to meddle more, react to noise, and chase performance in a space that rewards long-term patience, not quick reaction time.
Oscar Valdés Viera at Americans for Financial Reform put it best:
“People save for their retirement for decades, allowing them to steadily grow a nest egg that can provide economic security for years… that relies on stability, transparency, low fees, and appropriate levels of investment risk.”
Private equity introduces complexity, illiquidity, and higher fees—three things most retirement savers should avoid.
Who is PE right for?
Remember when I said I’m fortunate to work across every tier of wealth management—from new investors to the 1% looking to build a Family Office—I have a front-row seat at each level.
This perspective helps me see who private investments are truly suited for… and who they’re not.
Beginners:
Don’t even think about it. Stick to liquid, diversified investments. Focus on getting your financial house in order.
The Millionaire Next Door ($1M–$10M):
Probably not. Private investments come with drawbacks — long lock-up periods, random K-1 forms that complicate taxes, and the need to file extensions. For someone with relatively straightforward finances, it often adds complexity without commensurate reward.
In fact, I know more people trying to exit these investments (and having a hard time doing so) than those looking to get in.
Very Wealthy Families ($10M–$30M):
Potentially. This is where you can have a tangible portfolio to invest in ideas, causes, and/or people that matter to you. You can also have a multi-generational bucket of high-risk assets that you believe has the opportunity to grow exponentially over time.
If there’s sufficient liquidity elsewhere, and if the family has the risk tolerance and patience, certain private investments may make sense—but only as a small piece of a broader portfolio.
Generational Wealth ($50M+):
Now we’re talking. This is the stage where you need to think like an institution. Private investments can act as an additional diversifier, alongside real estate, operating companies, and other alternative strategies.
At this level, you likely have the time horizon, the resources, and the infrastructure (including tax, financial, and legal support) to properly evaluate and monitor these deals.
