In recent years, private equity and private credit have surged in popularity. Investors are often drawn in by the promise of higher returns, reduced volatility, and diversification away from public markets. On the surface, these investments can appear compelling. But when you look more closely, the reality is far less attractive. These investments are often viewed as a way to reduce risk, but understanding the real risks of private equity and private credit is essential.
Private equity refers to investments in companies that are not publicly traded, typically through pooled funds that acquire, restructure, and eventually sell businesses. Private credit, on the other hand, involves lending directly to companies outside of traditional banking channels, often in the form of structured or illiquid debt.
The appeal is easy to understand, as these investments are often marketed as “uncorrelated” to the stock market and less volatile than publicly traded securities, but this perceived stability is largely an illusion.
Unlike public equities, which are priced continuously by the market, private investments are valued infrequently, often quarterly, and sometimes based on internal models rather than real transactions. This lag in pricing, often referred to as valuation lag in private equity, smooths out volatility on paper, but it does not eliminate the underlying economic risk. These assets are still exposed to the same economic forces that impact public markets, they just do not reflect it in real time.
In our view, this creates a false sense of diversification, as the “low volatility” is not a feature of the investment, but a function of how it is priced. This distinction matters, as investors may interpret smoothed returns as reduced risk, when in reality the underlying exposure remains unchanged.
Liquidity is where the trade-offs become even more apparent. Private investments are, by design, difficult to exit. Capital is often locked up for years, and even in newer structures that offer periodic liquidity, access is far from guaranteed. Recently, as more investors have sought to pull capital, many private funds have been forced to limit or “gate” redemptions, allowing only a fraction of requested withdrawals. This is not an anomaly, it is a structural feature. When underlying assets are illiquid, the fund itself must be as well.
This dynamic tends to surface at the worst possible time, when investors want access to their capital most.
Costs add another layer of concern. While fee structures vary, they are generally higher, more complex, and less transparent than what investors encounter in public markets. There are often multiple layers of compensation, and the true cost is not always easy to determine upfront. What is clear, however, is that a meaningful portion of returns is typically absorbed by the structure itself.
At GHPIA, we believe in transparency, liquidity, and alignment. Public markets, while sometimes more volatile in the short term, provide real-time price discovery, daily liquidity, and far greater clarity around costs. Investors know what they own, what it is worth, and what it costs.
Private investments are not inherently flawed, but they are often misunderstood and, in many cases, oversold. The perception of stability and diversification can be misleading, while illiquidity, limited transparency, and higher costs are very real.
In our view, investors are better served by embracing the discipline and clarity of public markets, rather than relying on the illusion of smooth returns.
Private equity and private credit investments are valued infrequently, often on a quarterly basis, and sometimes using internal models rather than actual market transactions. This lag in pricing smooths out reported volatility, but it does not reduce the underlying economic risk. The assets are still exposed to the same forces that move public markets; the difference is that the pricing does not reflect it in real time.
When a private fund gates redemptions, it restricts how much capital investors can withdraw during a given period, sometimes allowing only a fraction of requested withdrawals. This happens because the fund’s underlying assets are illiquid and cannot be sold quickly to meet redemption requests. Gating is not an emergency measure; it is a structural feature of private market investing, and it tends to occur when investors most need access to their capital.
Private equity and private credit typically carry higher, more complex, and less transparent fee structures than publicly traded investments. There are often multiple layers of compensation embedded in the structure, making the true cost difficult to assess before committing capital. In public markets, costs are generally more straightforward, and investors can more easily evaluate what they are paying relative to what they receive.
Top Row L to R: Brad Engle, Mike Sullivan, Sebrina Ivey, Christian Lewton, Jason Kitner
Bottom Row L to R: Carin Wagner, Angela Kennedy Lee, Jenny Merges, Brian Friedman, Deirdre Mcguire, Barbara Terrazas, Reed McCoy