I’ve been seeing a massive uptick in ads and articles lately pitching Private Equity and Private Credit to everyday retail investors. The narrative is always the same: the brokers claim they want to give us access to the same high returns that endowments and the ultra-wealthy have enjoyed for years.
But I’ve been digging into the market data and I’m convinced this is fishy as fuck. It looks a lot less like an opportunity for us and a lot more like a desperate need for exit liquidity for the big players.
Institutional investors like pension funds and endowments are currently “over-allocated” to private markets. Because public stocks took a hit or stayed flat over the last couple of years while private valuations didn’t mark down as fast, their portfolios are out of balance. They are effectively tapped out. They can’t put more money in, and more importantly, they are screaming for cash distributions. They want their money back, but VCs and PE firms are struggling to give it to them because the IPO market is tepid and M&A is slow.
This is where the retail investor comes in. Since the “smart money” is tapped out, Wall Street needs a new ocean of capital to keep the machine running. They need someone to buy the assets that the older funds need to sell.
You can see this clearly in the AI sector. We all know valuations for AI startups like OpenAI are completely disconnected from reality, often trading at over 100 times revenue with little to no profit. Hedge funds and VCs who bought in during the 2021 hype or the recent AI boom are sitting on massive paper gains, but they having the problem, that if they would try to IPO these companies right now, the public markets might reject those valuations, forcing a “down round” that crushes their returns and makes them lose a shit ton of money.
The solution is to avoid the public market entirely. Instead, they move these assets into “continuation funds” or sell them on the secondary market. And who is financing this? It’s retail capital. They are effectively moving assets from the pockets of savvy institutional investors who want out into the pockets of retail investors who are just getting in. The most dangerous part is how they structure it. They sell these as “semi-liquid” funds, but the liquidity is an illusion.
These funds have “gates,” meaning that if everyone panics and tries to sell at once, like in a recession, they simply lock the door. We saw this with Blackstone’s real estate fund recently.
So you basically become the bag holder for assets that are too expensive for the public market to touch.
Just know that when you hear about the “democratization of finance” be very careful. “Democratization” usually happens right at the end of a cycle when the insiders need someone to sell to, true to the motto: privatize earnings, socialize losses.
https://www.reddit.com/r/investing/comments/1pn6w9k/the_sudden_push_to_democratize_private_equity/