By Mark Hulbert
Private-equity funds are increasingly available to retail investors. Be careful.
Large institutional investors are the first to exploit a market niche. Only when they eventually sour on it are retail investors invited to the party.
Vanguard Group, the mutual-fund giant, recently announced a plan to give retail investors greater access to private equity. Meanwhile, the manager of one of the world’s largest sovereign-wealth funds was declaring private equity to be a troubled investment.
These two scenes fit an all-too-common script in the investment world: Large institutional investors are the first to exploit a market niche. Only when they eventually sour on it are retail investors invited to the party.
I’ve written about this pattern before when discussing alternative investments such as hedge funds and real estate. William Bernstein of EfficientFrontier.com captured this narrative beautifully when he said the first investors arriving at “the alternatives banquet table … loaded up on lobster tails and prime rib and those who followed … got the tuna noodle casserole.”
Many investors are nevertheless eager to invest in private equity and other alternative investments, given the stock market’s overvaluation and bond-market turmoil. Vanguard and its partner firms undoubtedly are simply responding to that demand, but investors and their financial advisers should know that there’s a good chance they’ll suffer the fate of other latecomers.
Some of the first opportunities for retail investors to approach the private-equity table were in the exchange-traded-fund arena. As you can see from the chart above, neither of the two most prominent private-equity-focused ETFs – Invesco Global Listed Private Equity PSP and ProShares Global Listed Private Equity PEX – have outperformed the broad-based Vanguard Total World Stock ETF VT over any trailing 1-, 3-, 5- or 10-year period.
These private-equity ETFs’ returns are by no means the final word on private-equity investing, since there is an intense debate in academia over how best to calculate private-equity performance. Some researchers have found that the average PE fund has beaten the public markets on a risk-adjusted basis over the long term. Nevertheless, it is safe to say, given both the chart and the academic controversy, there is no straightforward or automatic path in the PE arena for retail investors to earn market-beating profits.
The current situation for PE is particularly grim, according to Sheikh Saoud Salem Abdulaziz Al-Sabah, managing director of the $1 trillion sovereign-wealth fund Kuwait Investment Authority. Speaking at the Qatar Economic Forum in May, Al-Sabah said: “We’ve been seeing private-equity funds grow up in size with the same number of portfolio companies. You’re seeing them coming up at 10, 15, 20 billion dollars in size. If the base case of underwriting is two times your return, it means you have to be realizing $40 billion worth of assets. The question is, who’s going to buy them?”
Answering his own question, Al-Sabah said, “I don’t know. And the worst part of it is they’re approaching the end of their fund life cycle.”
Few details of Vanguard’s private-equity offering have been announced, other than that it will involve a partnership with money managers Wellington Management and Blackstone. An April press release announcing the partnership simply said “solution details are expected to be announced in the coming months,” adding that the three investment firms “will collaborate on developing simplified multiasset investment solutions that seamlessly integrate public and private markets as well as active and index strategies” that would otherwise be available only to institutional investors.
If, despite the warning signs, you still are interested in Vanguard’s eventual private-equity offering, pay particularly close attention to the management fees it will charge. Chances are it will be a fund of funds, which means you can expect layers of fees – fees that can easily eat up much or all of private equity’s returns.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Why America’s aging population will be a problem for stocks – and your retirement
Also read: U.S. small-cap stocks have been playing catch-up for years. Don’t expect that to change anytime soon.
-Mark Hulbert
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
06-04-25 0846ET
Copyright (c) 2025 Dow Jones & Company, Inc.
