Private markets are having a moment. Once largely reserved for institutions and ultra-wealthy investors, private equity, private credit and other alternative investments are increasingly showing up in everyday investors’ portfolios and in conversations with their financial advisors.
But greater access doesn’t necessarily mean these investments belong in every portfolio. In a recent Wall Street Journal column, Jason Zweig raised an important question: What should investors ask when an advisor recommends a private fund? Before chasing the promise of higher returns or opportunities unavailable on public markets, it’s worth understanding exactly what private investments offer, and what investors may be giving up in return.
Before allocating capital to private investments, apply a significantly higher level of scrutiny than you would for a standard, transparent index fund. Public markets consist of companies whose shares, commonly known as stocks, can be bought and sold by individual investors on public exchanges. Public markets offer democratized access for shares to anyone, whereas private companies restrict ownership access and cannot be bought on public exchanges.
However, some investment funds give individuals access to opportunities they typically couldn’t purchase on their own, including private companies, private real estate and private credit. Before investing in private markets, make sure you can answer some key questions about each opportunity.
Question 1: What Are the Fees?
Private market investments feature complex, multi-layered fee structures including significantly higher baseline management fees and profit-sharing cuts. Even when those fees are disclosed, figuring out exactly what you’re paying can be surprisingly difficult. The fine print often assumes a level of familiarity with private investments that many investors simply don’t have. That’s where a financial advisor can help by breaking down the costs, explaining how they affect returns and helping determine whether the investment is worth the added expense.
Because private deals typically carry higher fees, they must outperform low-cost public alternatives by a wide enough margin to justify those additional costs. Private investments often introduce hidden complexities, including delayed K-1 tax filings, potential extension fees, and more complicated estate planning.
Related: Should I Pay off Debt or Invest?
Question 2: How Liquid is the Investment?
Liquidity is simply how quickly an investment can be sold and turned into cash you can actually use. With mutual funds, that money can often be back in your bank account within 24 to 72 hours. Private investments are different. Your money may be tied up for years in something like an apartment development, a private company or another long-term project, with limited opportunities to cash out before the investment runs its course.
Private funds frequently enforce strict illiquidity provisions and multi-year lock-up periods that limit your ability to access cash when needed. That lack of liquidity should also raise the bar for the return you expect from the investment. A simple question to ask is: If I called next month and wanted my money back, could I get it? If so, how long would it take, and what would the process look like?
Another factor to consider is that private funds often follow a J-curve: returns may decline at first as the fund puts capital to work, with the goal of delivering stronger gains years later. That means selling early can be especially costly, as you may not only miss out on the expected returns but also receive less than the amount you originally invested.
Private investments can also be harder to value along the way. Public investments are priced frequently, making it relatively easy to see what an investment is worth. Private assets, by contrast, are typically valued less often, so account statements may not reflect short-term price swings or real-time changes in the market.
Question 3: What Problem is This Solving for Me?
Before committing capital, ask what specific portfolio problem a private investment solves that cannot be accomplished through traditional market assets. Don’t invest in private markets simply because they seem more exclusive or sophisticated. For high-net-worth investors, that can be an easy trap to fall into. Having significant capital means plenty of managers will be eager to pitch opportunities and put that money to work. You have to ask yourself: what’s important to you about money and what do you need this money to do?
It’s also worth remembering that access to private markets doesn’t necessarily mean access to the best private investments. Some of the most attractive opportunities circulate through established networks and word of mouth and may require commitments of tens of millions of dollars—putting them well beyond the reach of even many wealthy individual investors.
Achieving a high net worth doesn’t mean your investment strategy has to become more complicated. Even with $20 million or $80 million, a simple, low-cost portfolio can still be the right approach. Don’t get bored making money. There’s no need to abandon investments such as the S&P 500 simply because they seem too familiar or unsophisticated. Sometimes the strategy that has worked for decades and costs less to own is still the better one.
Question 4: Does Your Advisor Have Financial Ties to the Private Deal?
Consistently contributing to a 401(k) is nearly useless if you forget to select actual growth investments, leaving your money uninvested in cash for decades. Contributing is only the first step; you also need to make sure those dollars are invested in a way that aligns with your goals, time horizon and risk tolerance. Otherwise, you could miss out on years of potential market growth and the power of compounding.
The value of thoughtful planning and a good financial advisor often shows up in ways that aren’t reflected on an annual investment statement. Tax strategy, account selection, withdrawal planning and other decisions can all improve your financial outcome even when they don’t appear as part of your portfolio’s return.
This material is for general informational and educational purposes only and is not individualized investment, tax, or legal advice. Warburton Capital does not provide tax or legal advice; consult a qualified professional regarding your situation. Advisory services involve fees and risks, including the risk of loss, and there is no guarantee that any strategy will achieve its objectives.
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