Retail access to private markets: hidden risks investors can’t ignore
- Robin Powell
- 46 minutes ago
- 5 min read
A new academic study reveals that retail investors aren’t just paying higher fees for riskier private-market products. They’re also being channelled into systematically weaker funds than their wealthier counterparts.
Retail access to private markets has grown rapidly in recent years. Glossy brochures promise investors stability, exclusivity, and diversification in exchange for stepping away from traditional listed markets. Business development companies, semi-liquid funds, and other private vehicles are dressed up as a smoother, more sophisticated way to invest.
We’ve written before about the familiar problems — high fees, complex structures, liquidity that disappears in a crisis. But new research from Benjamin C. Bates, a research fellow at Harvard Law School, shows there’s something even more troubling going on beneath the surface.
It isn’t just that private-market products oversell their virtues. It’s that different tiers of investors are being sold different quality goods. And the least sophisticated buyers are the ones ending up with the weakest products.
The illusion of stability
One of the great selling points of retail-facing private vehicles is how calm their return profiles look. Net asset values barely move from month to month, and correlations with public markets seem strikingly low. On paper, it looks like a dream diversifier.
But Bates shows that this “low volatility” is almost entirely an illusion. These funds hold assets that don’t trade every day, so managers are left to mark them using models. The result is a smoothed-out series of returns that understate the risk.
How do we know? Because where there’s a listed market to compare with, the difference is stark. Publicly traded BDC shares have more than four times the volatility implied by their reported NAVs . The risk hasn’t disappeared — it has simply been hidden in the accounting.
For investors, that means the promise of diversification is built on sand. In a crisis, correlations spike and the losses appear suddenly, not gradually.
When liquidity vanishes
The CION example makes the danger tangible. Before its shares began trading publicly, CION reported an NAV of $16.52. Once liquidity arrived, the market valued them at just $11.85 . Almost overnight, investors who thought they owned one thing discovered they owned something worth 30% less.
That pattern isn’t unusual. These funds often advertise periodic liquidity — quarterly redemption windows or capped withdrawals. But when too many people head for the door at once, the shutters come down. The liquidity that looked so attractive in the brochure is revealed to be optional, not guaranteed.
Retail access to private markets: a level playing field?
The genuinely fresh contribution in Bates’ paper is evidence of adverse selection across investor groups.
He finds that BDCs available only to accredited or wealthier investors report better performance than those sold more broadly, even after controlling for other factors . Put simply, the higher-quality funds are reserved for the insiders, while mass-market buyers are channelled towards the weaker versions.
For ordinary retail investors, that means the playing field isn’t just tilted — it’s structurally rigged. Those without large balances or professional status are left with the second-tier products, and the odds of success diminish accordingly.
Fees that belong in hedge funds
Layered on top of all this are costs that would make even the most expensive mutual fund blush. BDC investors typically pay 4–5% a year in combined expenses . Non-traded closed-end funds are somewhat cheaper, but still far costlier than mainstream active funds.
That level of ongoing drag is almost impossible to overcome, especially when combined with the understated risks and the possibility of liquidity gates. It raises an uncomfortable question: who are these products really designed to enrich?
Why it matters now
This isn’t a marginal issue anymore. Assets in retail-facing private funds have nearly quadrupled in just five years, from just over $100 billion to more than $400 billion . Regulators in both the US and UK are actively debating whether to open the doors wider.
The scale alone demands scrutiny. But combined with the evidence of product sorting, it points to a looming investor-protection problem. Unless standards are tightened, the next downturn will expose just how vulnerable retail buyers are when they rely on smoothed returns and conditional liquidity.
What should change
Bates argues for three key reforms:
Fairer valuation practices — ensuring reported NAVs reflect real market movements.
Clearer disclosure of volatility and risk — so investors understand that “smooth” returns are misleading.
Simpler, more comparable fees — reducing the incentive to funnel less sophisticated investors into inferior, higher-cost products .
For regulators, that means the Consumer Duty in the UK and the SEC’s ongoing reviews in the US must address not just transparency but also the deeper problem of adverse selection.
What investors should do
For retail investors and advisers, the lessons are more immediate:
Treat smooth return charts with suspicion. If it looks too calm to be true, it probably is.
Scrutinise liquidity terms. Ask exactly when and how you can get your money back — and what happens in a stress scenario.
Do a “fee map.” Add up the management fees, performance fees, transaction costs, and platform charges. If the total is 4–5% a year, ask what value you are really receiving.
Compare with simple alternatives. A globally diversified index fund offers genuine liquidity, transparent pricing, and costs below 0.2%.
Most importantly, resist the idea that exclusivity equals superiority. The evidence suggests the opposite: the broadest retail offers are often the weakest products.
A familiar story, with a new twist
None of this will surprise seasoned readers of TEBI. We’ve long warned about the dangers of opaque, high-cost investments dressed up as alternatives. What’s new here is the clear demonstration that ordinary investors are being sorted into inferior versions.
That should give pause not only to individuals tempted by the marketing but also to advisers and policymakers deciding whether these products belong in mainstream portfolios.
Because if retail access to private markets is going to play a bigger role in household investing, the least regulators and sponsors can do is ensure that retail buyers aren’t permanently consigned to the second division.
Reference
Bates, B. C. (2025). Retail Access to Private Markets. SSRN Working Paper No. 5381902 .
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