Should you have private equity in your pension?
- Robin Powell
- 44 minutes ago
- 10 min read
Private equity, once the exclusive preserve of sovereign wealth funds and university endowments, is coming to a pension near you. Governments on both sides of the Atlantic are actively encouraging it, and the industry's enthusiasm is hard to miss. But before your retirement savings get redirected into one of finance's most complex and costly asset classes, it's worth asking whether the evidence supports the pitch.
There's a particular kind of sales pitch that's hard to resist. It goes something like this: most people make do with the ordinary option, but you — if you're smart enough, connected enough, willing to commit — can access something better. A members' club with a better cellar. A restaurant that doesn't advertise. An investment opportunity that institutions have quietly exploited for decades while everyone else settled for index funds.
The pitch works because it flatters. And it's been a staple of financial marketing for as long as the industry has existed.
Private equity has always been that members' club. Entry was restricted to sovereign wealth funds, university endowments, and the very largest pension schemes: the kind of investors who could write nine-figure cheques and wait a decade for their money back. The returns, the story went, justified both the exclusivity and the patience.
Now they want to let you in too. And it's your pension they have in mind.
The industry has a new pitch, and it's aimed at your pension
The word the private equity industry uses is "democratisation": the idea that ordinary investors deserve the same opportunities as institutions. It sounds generous, and may even be well-intentioned. But it helps to know that retail investors collectively hold roughly half of all global wealth, and that institutional fundraising has been slowing. When the existing pool of capital dries up, finding a new one isn't altruism.
The policy momentum is real. In May 2025, seventeen major UK workplace pension providers signed the Mansion House Accord, committing to allocate at least 10% of their default funds to private markets by 2030, with the government reserving the right to legislate if voluntary commitments fall short. In the US, an executive order signed in August 2025 instructed the Labor Department to review whether private equity should be permitted within ERISA-governed retirement accounts, potentially unlocking trillions in defined contribution savings.
The club is opening its doors. The question worth asking — before your pension walks through them — is whether that's good news for you, or primarily good news for the club.
The returns case is built on shakier ground than the brochure suggests
The headline numbers look compelling. UK Private Capital, the industry body formerly known as the BVCA, reports that UK private equity and venture capital funds returned approximately 15.8% annually over the past ten years, against 6.2% for the FTSE All-Share.
Numbers like that tend to end conversations before they've properly started. But there's a measurement problem buried in that comparison, and it matters.
Private equity returns are typically expressed as an internal rate of return, a figure sensitive to the timing of cash flows that can, in skilled hands, look considerably better than a straightforward market comparison warrants. Public market indices are measured on a time-weighted basis, which treats each pound invested equally regardless of when it went in.
Comparing the two is a bit like judging a sprinter against a marathon runner and declaring the sprinter faster.
When researchers at Harvard Business School applied a more rigorous methodology, matching PE cash flows against equivalent investments in public markets, the picture changed considerably. Nori Gerardo Lietz, in a paper titled Should Mom Have Private Equity in Her 401K? (Harvard Business School Working Paper 26-026, 2025), tracked what she calls "direct alpha": the excess return private equity actually delivered above an equivalent public market investment, measured on the same basis. The chart below tells the story.
The BVCA figures also combine private equity with venture capital — two quite different beasts — and come from an organisation with an obvious interest in presenting the asset class favourably.
There's a structural explanation too. The PE industry has roughly quintupled in assets under management since 2014. When a strategy that worked partly because few people were doing it becomes one of the most crowded trades in institutional finance, the excess returns compress. The golden era of private equity performance was built in a different market, a smaller and less competitive one. That history is now being used to sell a future that may look quite different.
Past performance won't help you pick tomorrow's winners
Even if you accept that private equity can still beat the market, there's a second problem: finding the managers who'll actually do it.
The conventional wisdom has always been to back top-quartile performers: find the funds with the strongest track records and commit to their next vehicle. For much of PE's history, this made sense. Early academic research found that performance persisted — managers who'd done well tended to do well again.
That finding no longer holds for buyout funds. Research by Harris, Jenkinson, Kaplan and Stucke examined persistence across more than 2,200 US private equity funds using detailed cash-flow data. Their conclusion was stark: for buyout funds raised after 2000, performance persistence effectively disappears when measured at the point of fundraising, the moment an investor has to decide. Sorting funds by their previous performance quartile tells you almost nothing about how the next fund will do.
Venture capital funds do still show some persistence. But buyout PE is the category most likely to appear in DC pension default funds. And for buyouts, picking winners looks closer to a coin toss than a skill.
Follow the money: why the PE industry wants access to your pension
You don't need much detective work to understand why the private equity industry is so keen on retail access. The industry has roughly quintupled in assets under management since 2014. That growth was fuelled by institutional capital — pension funds, endowments, sovereign wealth funds — but that pool has limits, and institutional fundraising has been slowing.
The fees make the motive transparent. PE firms earn management fees on committed capital and a share of profits on successful exits. More assets under management means more of both. The firms that capture the largest share of DC pension allocations stand to benefit enormously, regardless of what those allocations ultimately return to savers.
Most retail investors won't access private equity directly. They'll get it via fund-of-funds structures or target-date retirement funds managed by a third party, adding another fee layer between the underlying investment and the individual saver. David Swensen, the Yale endowment chief who pioneered institutional PE investing, was characteristically blunt about this model. As reported by Private Equity International in 2009, he described fund-of-funds as "a cancer on the institutional investment world" that facilitated "the flow of ignorant capital" into private markets.
That was a warning aimed at institutions. The retail version carries the same costs — and rather less of the sophistication.
The fee stack retail investors will actually pay
The standard fees for a private equity fund (typically a management fee of around 1-2% of committed capital annually, plus a performance fee of roughly 20% of profits above a hurdle rate) are already high. Institutional investors pay those fees directly, without intermediaries. Retail investors rarely will.
Lietz (2025) uses Blackstone's BREIT as an illustration. On top of the standard GP fees, retail investors buying through a distributor pay an upfront placement fee and an ongoing annual oversight fee. Lietz calculates that the oversight fee alone represents a meaningful drag on returns relative to an institution in the same underlying strategy, before any assessment of whether the strategy outperforms.
The fund-of-funds data makes the cumulative cost visible. Across every time horizon Lietz examined, using Pitchbook data, fund-of-funds vehicles failed to match public market returns on a properly adjusted basis. In some periods the shortfall was considerable.
In the UK, there's a specific regulatory problem on top of this. DC pension default funds operating under auto-enrolment rules face a charge cap of 0.75% annually. Private equity's fee structures sit well above that level, and in December 2025 the FCA signalled it would consult on whether performance fees should be treated differently within the cap. That consultation hasn't concluded. Until it does, the arithmetic of adding private equity to a capped default fund remains unresolved.
Illiquidity: the risk they don't highlight in the brochure
Institutions can absorb illiquidity because their cash flows are pooled, long-term, and broadly predictable. A large defined benefit scheme knows roughly what it'll owe members over the next decade. It can plan around a ten-year lockup. An individual can't.
People lose jobs. They get ill, divorce, change careers, need to help a child with a house deposit. These aren't edge cases — they're just life. And they rarely announce themselves in advance.
The products designed to bridge this gap offer periodic liquidity windows, typically allowing redemptions of a few percent of fund assets per quarter. In calm markets, that works. Under stress, it doesn't. Blackstone's BREIT restricted redemptions during the market turbulence of 2022-23, with withdrawals capped as a proportion of NAV. Investors who needed their money couldn't get it.
The alternative — selling in the secondary market — is available, but not at the price you'd want. Distressed sellers typically accept a significant discount to NAV.
What Lietz's research suggests instead
Lietz's paper doesn't just document the problems with retail PE access. It also points to what she considers a more rational approach for individual investors.
Her finding centres on the publicly listed stocks of the major PE firms themselves. Analysing data through to the end of 2024, she found that a basket of listed PE companies (Apollo, KKR, Blackstone, Ares and Carlyle among them) dramatically outperformed those same firms' private flagship funds over both five and ten years. Her argument is that buying shares in the PE firm itself gives investors exposure to its economics — the management fees, the carried interest, the compounding value of growing assets under management — with full stock market liquidity and at a fraction of the cost of the private funds.
Lietz is explicit that this is her view, not a consensus position, and it should be read as such. For UK investors interested in exploring the idea, listed private equity investment trusts offer a comparable listed route. HarbourVest Global Private Equity, Pantheon International, NB Private Equity Partners and ICG Enterprise Trust all trade daily on the London Stock Exchange and offer diversified exposure to the asset class without the lockup.
There is a genuine catch worth noting. Listed PE trusts can trade at significant discounts to their reported net asset value, sometimes well into double figures, meaning the market price may not reflect what the underlying portfolio is actually worth. That's a real risk, and anyone considering this route should understand it before investing.
None of this constitutes investment advice, and we are not recommending any of the above. We are reporting what Lietz found and letting readers draw their own conclusions.
What to do if your pension is heading into private equity
The Mansion House Accord means that if you're in a large UK workplace pension scheme, private markets may well be coming to your default fund whether you've asked for them or not. That's not a reason to panic — but it is a reason to pay attention.
Start by asking your pension provider a direct question: how much of your default fund will be allocated to private markets, and what will the all-in cost be? If the answer isn't clear, keep asking. You're entitled to know what you're invested in and what you're paying for it.
Check specifically whether total charges will remain within the 0.75% annual cap that applies to auto-enrolment default funds, and watch for any changes to that cap as the FCA's consultation develops.
If you want private equity exposure on your own terms, the listed investment trust route Lietz identifies is worth understanding. A stocks and shares ISA or SIPP gives you a tax-efficient wrapper, a market price, and the ability to exit when you choose.
And when someone tells you that exclusive access equals better returns, remember that the evidence for that claim is considerably weaker than it once was.
The exclusive access isn't what it used to be
"The private members' club was always a sales pitch as much as a genuine opportunity, and the best sales pitches are the ones that make you feel lucky to be asked."
The private members' club was always a sales pitch as much as a genuine opportunity, and the best sales pitches are the ones that make you feel lucky to be asked. Private equity is no different. The returns that built its reputation were real, but they belong to an earlier era, a smaller industry, and investors who paid institutional prices for institutional access. What they're offering pension savers now is something rather different, at much higher cost, with far less evidence that it will deliver. You're allowed to say no. Or at least, to ask a few pointed questions before you sit down.
Resources
Lietz, N. G. (2025). Should mom have private equity in her 401K? Harvard Business School Working Paper 26-026.
UK Private Capital. (2025, June). Performance measurement survey 2024.
Harris, R. S., Jenkinson, T., Kaplan, S. N., & Stucke, R. (2020). Has persistence persisted in private equity? Evidence from buyout and venture capital funds. NBER Working Paper No. 28109.
Swensen, D. (2009, January). Funds of funds are a "cancer." As reported by Private Equity International.
Financial Conduct Authority. (2025, December 9). Letter to the Prime Minister: growth approach.
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