Private investments, particularly private equity and private credit, have seen a surge in popularity in recent years. Once exclusive to institutional portfolios, these asset classes have become democratized, increasingly accessible to retail investors and marketed as innovative solutions that offer unique advantages. What was once the domain of pensions, endowments and sovereign wealth funds now promises benefits to a broader audience.
But private equity and private credit are not revolutionary opportunities—they’re simply equity and debt investments in companies and borrowers that happen to operate outside public markets. Yet they are now being promoted as unique and transformative investments with features that allegedly drive higher returns and lower risk.
Beneath the surface of glossy presentations and growth charts lies a central question: Are these investments truly as alternative as marketed, or are they just traditional asset classes wearing a leather vest and a studded belt?
Limited liquidity: a feature or a bug?
One of the most frequently touted benefits of private investments is their illiquidity. Investors are told that the lack of a liquid market creates an “illiquidity premium,” compensating them for accepting limited access to their capital, which is a real risk. Historically, this idea has merit: private equity funds have outperformed public markets over most time horizons (although I would question if the magnitude of outperformance is as significant as is often marketed).
However, as private investments become more accessible and fund structures promise greater liquidity, it’s worth asking whether this premium will erode. The growth of secondary markets and fund managers offering redemption features challenges the traditional illiquidity narrative. If private assets become more liquid, will they still deliver a premium, or will they just inherit the volatility and pricing characteristics of public markets?
Are private returns truly uncorrelated?
Another commonly cited feature is that private investments offer uncorrelated returns, providing diversification benefits to a portfolio. Unlike public markets, private assets are not subject to daily price swings, and their valuations rely on periodic appraisals rather than real-time trades. On the surface, this lack of observable volatility makes private assets appear more stable.
Tell me what’s real: the neuroticism of daily stock market movements or the stubborn pricing practices of private asset managers.
But is this stability genuine, or merely an illusion created by infrequent pricing? The absence of a liquid market does not mean that the underlying value of a private investment is immune to broader economic forces. A recession that impacts public companies will likely affect private businesses, even if their valuations remain steady on paper for months.
The notion of uncorrelated returns may stem more from limited price discovery than from true independence of economic factors. After all, private equity is just equity without the public market. Internally, I’ve called this price stability and the uncorrelated returns “fake,” but that is a bit harsh. “Misleading” or “massaged” would be more appropriate terms.
A recent example can be seen with REITs. Public REITs saw significant declines in price through the rate increases of 2022, while private REITs saw much more modest declines. However, many private REITs also limited redemptions during this time. Presumably, if they had to fulfill redemptions, they would have had to sell properties at prices below their carrying values.
Tell me what’s real: the neuroticism of daily stock market movements or the stubborn pricing practices of private asset managers. Or are we just comparing the Easter Bunny to Santa Claus?
Governance: the appeal of private markets
Proponents of private investments often argue that the governance structures in private markets lead to better outcomes. Without the pressures of quarterly earnings calls and public shareholders, private companies can focus on long-term value creation. As an owner-operator of a private business myself, this idea has a lot of merit. I can’t imagine trying to appeal to the short-termism of public markets.
Investors must navigate a landscape with less transparency and more complexity.
Yet, this narrative assumes that private governance is inherently superior, which may not always hold true. Many private equity-backed companies face aggressive growth targets and cost-cutting mandates designed to maximize short-term returns for the fund—not necessarily for the business’s long-term health. Furthermore, the concentration of control in private markets can create significant conflicts of interest, where one party prioritizes their own returns over those of their investors. Transparency in governance is not a given, and investors must carefully evaluate the oversight and incentives in each opportunity.
Fewer public companies, more private opportunities?
The shrinking universe of public companies is often cited as a reason to look toward private markets. In 1996, there were more than 8,000 publicly traded companies in the U.S.; today, that number is less than half. The implication is clear: With fewer public opportunities, investors must turn to private markets to access companies at various stages of their lifecycle.
For investors, this trend offers access to companies at different stages, from early-stage startups to mature enterprises. However, it also means that investors must navigate a landscape with less transparency and more complexity.
What do you believe?
Private equity and private credit have undeniably expanded the horizons of modern investing, as they offer access to unique opportunities, long-term value creation, and potentially compelling returns. However, they are not a panacea, nor are they as “alternative” as the marketing might suggest. These investments are, at their core, just equity and credit—with additional layers of complexity, cost and risk.
To allocate capital to private equity or private credit, investors must buy into several assumptions:
- Higher fees are worth it: Private investments come with higher management fees and performance incentives. Investors must believe that these costs are justified by superior returns, lower risk, or a combination of the two.
- Conflicts of interest are manageable: Fund managers may have incentives that may not align perfectly with those of their investors, especially as they have more discretion over the valuation of their investments. This dynamic requires trust and thorough vetting.
- Less transparency is acceptable: Private investments typically involve less disclosure and more opaque reporting. Investors must be comfortable with less visibility.
The allure of private equity and private credit lies in the promise of higher returns and unique investment opportunities. These potential benefits come with trade-offs. As these asset classes continue to grow in popularity, investors need to critically evaluate whether their claimed advantages justify the inherent challenges and risks.
Josh Sheluk is Portfolio Manager at Verecan Capital Management, based in Toronto.
The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.
Please visit here to see information about our standards of journalistic excellence.