Private markets have a few problems
Private equity, private debt and buyout funds have several problems. The golden era is past. First the number of easy pickings from undervalued companies have been eaten to the bone by all the dozens of funds that have hopped on the bandwagon. Second virtually free financing at interest rates close to zero is long gone. And third the path to the ‘exit’ is narrower and overgrown. This exit bottleneck is preventing sale of what the New York Times estimates at 33,000 companies ready for sale. So, there’s not so much new money and a shortage of distributable cash.
Investing in private equity has in theory the advantage of not being exposed to fluctuating market beta but to operational and financial improvements in the companies in a PE portfolio thus providing returns in the long term better than those from public markets. But the trade-off is long term lock up, loss of liquidity and valuation transparency. So, PE investors have traditionally been accustomed to being patient.
But now the institutions – typically endowments, insurance companies, pension funds and private offices- which have been the largest investors are getting restless as their returns apparently diminish. In the past investors relied on strong valuation growth and favourable exits and long-term value. Institutional investors in PE were accustomed to measuring return in relation to receipt of cash distributions from successful exits. A high internal rate of return and a value sometime in the future is all very fine. But, as a former boss of mine so truly said “a profit without the cash is like a kiss without a bash.” Now investors are increasingly measuring returns by reference to distributed to paid in capital (‘DPI.’) Unlike theoretical valuation-based measurements DPI shows real outcomes.
Given the problems they face, managers and limited partners have devised a number of ingenious ways to stay in business and keep on earning fees by generating DPI, some might say artificially. One is continuation funds. These raise additional cash by sale of shares to other VC investors, or to raise funds from new or existing investors into a ‘continuation fund’ ‘to buy out assets from the original fund that are believed to have unrealised long-term potential that can’t immediately be realised’ This enables some original investors to be paid cash from the sale proceeds. Obviously, a sale like this his creates conflicts of interest, since the manager of LP is effectively selling to itself the assets with the greatest long term unrealised potential; and an elaborate quadrille of secondary expert valuers and other independent auditors and watchdogs is arranged to satisfy transparency concerns.
But this still leaves many legacy funds with a lot of temporarily unsalable assets. So, investors have difficult choices, either to put up more money for an investment in the continuation fund, accept a cash out price that is lower than historic valuation or stay in a fund whose assets may be of dubious quality or unsaleable at current valuations.
Private equity, private debt and buyout funds have several problems. The golden era is past. First the number of easy pickings from undervalued companies have been eaten to the bone by all the dozens of funds that have hopped on the bandwagon. Second virtually free financing at interest rates close to zero is long gone. And third the path to the ‘exit’ is narrower and overgrown. This exit bottleneck is preventing sale of what the New York Times estimates at 33,000 companies ready for sale. So, there’s not so much new money and a shortage of distributable cash.
Investing in private equity has in theorythe advantage of not being exposed to fluctuating market beta but to operational and financial improvements in the companies in a PE portfolio thus providing returns in the long term better than those from public markets. But the trade-off is long-term lock-up, loss of liquidity and valuation transparency. So, PE investors have traditionally been accustomed to being patient.
But now the institutions – typically endowments, insurance companies, pension funds and private offices- which have been the largest investors are getting restless as their returns apparently diminish. In the past investors relied on strong valuation growth and favourable exits and long-term value. Institutional investors in PE were accustomed to measuring return in relation to receipt of cash distributions from successful exits. A high internal rate of return and a value sometime in the future is all very fine. But, as a former boss of mine so truly said “a profit without the cash is like a kiss without a bash.” Now investors are increasingly measuring returns by reference to distributed to paid in capital (‘DPI.’) Unlike theoretical valuation-based measurements DPI shows real outcomes.
Given the problems they face, managers and limited partners have devised a number of ingenious ways to stay in business and keep on earning fees by generating DPI, some might say artificially. One is continuation funds. These raise additional cash by sale of shares to other VC investors, or to raise funds from new or existing investors into a ‘continuation fund’ ‘to buy out assets from the original fund that are believed to have unrealised long-term potential that can’t immediately be realised’ This enables some original investors to be paid cash from the sale proceeds. Obviously, a sale like this his creates conflicts of interest, since the manager of LP is effectively selling to itself the assets with the greatest long term unrealised potential; and an elaborate quadrille of secondary expert valuers and other independent auditors and watchdogs is arranged to satisfy transparency concerns.
But this still leaves many legacy funds with a lot of temporarily unsalable assets. So, investors have difficult choices, either to put up more money for an investment in the continuation fund, accept a cash out price that is lower than historic valuation or stay in a fund whose assets may be of dubious quality or unsaleable at current valuations.
If the show isn’t going well, let’s send in the clowns.
Enter the plucky punter, the retail investor, or at least the plucky punter’s pension scheme. The UK Long Term Asset Fund (‘LTAF’) equivalent to the EU European Long-Term Investment Fund (@ELTIF’) is one solution allowing investment in illiquid investments with limited redemption possibilities and the US SEC has plans for something similar in its “responsible retailization” of private markets consultation.
One of the findings of a survey by the UK Investment Association in 2025 Going Long, Going Local Retail Investors in Private Markets and UK Investment was:
“The survey found that 57% of investors would consider investing in a Long Term Asset Fund (‘LTAF’) when shown a description of it. Very few investors currently have access to ‘LTAFs’- only 2% of adults hold an Innovative Finance ISA, the only kind of account in which LTAFs may be held (and then only with financial advice. This points to significant untapped demand if access barriers are lowered”.
“Yippee!”
You can take a horse to water……… Neither LTAFs nor ELTIFs have been a notable success in the case of ELTIFS and LTAFs sales representing less than 1% of sales of mainstream UCITs. But you can force the horse to drink by imposing mandatory minima as is shown in the next paragraph.
Governments are in support:
“Investor demand for private market investment opportunities is growing, and one of my priorities for the Commission is to explore ways to facilitate the ability of individual investors to participate in private markets, while at the same time protecting those investors from bad actors and fraud. The Commission’s efforts in this regard — focused on expanding opportunities for investors’ post-tax, pre-retirement dollars — complement efforts undertaken pursuant to President Trump’s Executive Order on Democratizing Access to Alternative Assets for 401(k) Investors,” said SEC Chairman Paul S. Atkins
The UK government is urging defined contribution (DC) pension schemes to allocate up to 5% of default funds to unlisted equities and private capital by 2030 through the Mansion House Compact. The upcoming Pension Schemes Bill includes reserve powers allowing the government to mandate minimum private capital investments if voluntary targets are missed.
Industry bodies like Invest Europe have lobbied the European Commission to remove regulatory and institutional restrictions that block supplementary pension funds from investing in private equity and infrastructure.
Ruling-party lawmakers urged Japan’s massive Government Pension Investment Fund (GPIF) to expand allocations into domestic private equity and venture capital to build up the local private asset market”.
And a lot of the great and good of the investment world support it too.
In the UK Mansion House accord Signatories to the Accord, mainly insurance and pension fund managers, will pledge to invest 10 percent of their workplace portfolios in assets that boost the economy such as infrastructure, property and private equity by 2030. At least 5 percent of these portfolios will be ringfenced for the UK, expected to release £25 billion directly into the UK economy by 2030.
“Trebles all round for Private Equity Managers!”
Do governments put their money where their mouth is?
“Errrr, no”
The Parliamentary Contributory Pension Fund (PCPF) had less than 1.5% invested in UK equities. The justification “Under UK pension law, trustees have a strict fiduciary duty to maximize risk-adjusted returns solely in the financial interest of the pension scheme’s beneficiaries.” Nor does it invest in venture capital “The PCPF’s primary obligation is to maintain high liquidity to pay out immediate, guaranteed income to retired MPs and ministers. The long, highly illiquid lock-up periods typical of early-stage venture capital do not match this strategy” Indeed the PCPF is specifically exempted from the Mansion House accord target for pension funds of 5% in venture capital.
Nor does the US congress
Members of Congress participate in the same federal retirement structure as other federal civilian employees, known as the Federal Employees Retirement System (FERS). The underlying funds for federal civilian/congressional pensions are generally invested by the government in risk-free U.S. Treasury securities, not private equity.
Nor does the European Parliament
Of course not. Eurobudget will pay.
The cost of MEP’s pensions is covered entirely from the European Union budget.
Surely the Bank of England would support investment in the UK equities and venture capital too?
“Gosh far too risky!”
Its pension fund has 67% of its asset invested in Liability Driven Investments (‘LDI’) (. Under LDI instead of focusing purely on maximizing returns, managers invest in bonds (such as UK gilts) or derivatives whose values move in tandem with the organization’s future payout liabilities). And the rest in a range of high-grade corporate bonds. In other words, no equities.
So why are all these governments encouraging (and even compelling) retail investors put their future at risk?
I can do no better than quote from an article from the CFA Research Institute in 2025 by Sabastien Canderle, practitioner, lecturer and an author of books about venture capital, who is far more expert than I on the subject.
“As regulators move to open private markets to a wider investor base, the question is not whether retail access should be allowed, but whether the structure of these markets can support it. Illiquidity, opaque performance reporting, and misaligned incentives between fund managers and investors already challenge institutional participants. With fee structures built for scale and governance mechanisms that provide limited accountability, extending the model to smaller investors risks amplifying those weaknesses rather than democratizing opportunity”.
Of course, all the signatories of the Mansion House Accord and governments around the world may be right. If you think so and think I am wrong, good luck all you plucky punters! Let me know in ten years’ time.
If the show isn’t going well, let’s send in the clowns.
Enter the plucky punter, the retail investor, or at least the plucky punter’s pension scheme. The UK Long Term Asset Fund (‘LTAF’) equivalent to the EU European Long-Term Investment Fund (@ELTIF’) is one solution allowing investment in illiquid investments with limited redemption possibilities and the US SEC has plans for something similar in its “responsible retailization” of private markets consultation.
One of the findings of a survey by the UK investment Association in 2025 Going Long, Going Local Retail Investors in Private Markets and UK Investment was:
“The survey found that 57% of investors would consider investing in a Long Term Asset Fund (‘LTAF’) when shown a description of it. Very few investors currently have access to ‘LTAFs’- only 2% of adults hold an Innovative Finance ISA, the only kind of account in which LTAFs may be held (and then only with financial advice. This points to significant untapped demand if access barriers are lowered”.
“Yippee!”
You can take a horse to water……… Neither LTAFs nor ELTIFs have been a notable success in the case of ELTIFS and LTAFs sales representing less than 1% of sales of mainstream UCITs. But you can force the horse to drink by imposing mandatory minima as is shown in the next paragraph.
Governments are in support:
“Investor demand for private market investment opportunities is growing, and one of my priorities for the Commission is to explore ways to facilitate the ability of individual investors to participate in private markets, while at the same time protecting those investors from bad actors and fraud. The Commission’s efforts in this regard — focused on expanding opportunities for investors’ post-tax, pre-retirement dollars — complement efforts undertaken pursuant to President Trump’s Executive Order on Democratizing Access to Alternative Assets for 401(k) Investors,” said SEC Chairman Paul S. Atkins
The UK government is urging defined contribution (DC) pension schemes to allocate up to 5% of default funds to unlisted equities and private capital by 2030 through the Mansion House Compact. The upcoming Pension Schemes Bill includes reserve powers allowing the government to mandate minimum private capital investments if voluntary targets are missed.
Industry bodies like Invest Europe have lobbied the European Commission to remove regulatory and institutional restrictions that block supplementary pension funds from investing in private equity and infrastructure.
Ruling-party lawmakers urged Japan’s massive Government Pension Investment Fund (GPIF) to expand allocations into domestic private equity and venture capital to build up the local private asset market”.
And a lot of the great and good of the investment world support it too.
In the UK Mansion House accord Signatories to the Accord, mainly insurance and pension fund managers, will pledge to invest 10 percent of their workplace portfolios in assets that boost the economy such as infrastructure, property and private equity by 2030. At least 5 percent of these portfolios will be ringfenced for the UK, expected to release £25 billion directly into the UK economy by 2030.
“Trebles all round for Private Equity Managers!”
Do governments put their money where their mouth is?
“Errrr, no”
The Parliamentary Contributory Pension Fund (PCPF) had less than 1.5% invested in UK equities. The justification “Under UK pension law, trustees have a strict fiduciary duty to maximize risk-adjusted returns solely in the financial interest of the pension scheme’s beneficiaries.” Nor does it invest in venture capital “The PCPF’s primary obligation is to maintain high liquidity to pay out immediate, guaranteed income to retired MPs and ministers. The long, highly illiquid lock-up periods typical of early-stage venture capital do not match this strategy” Indeed the PCPF is specifically exempted from the Mansion House accord target for pension funds of 5% in venture capital.
Nor does the US congress
Members of Congress participate in the same federal retirement structure as other federal civilian employees, known as the Federal Employees Retirement System (FERS). The underlying funds for federal civilian/congressional pensions are generally invested by the government in risk-free U.S. Treasury securities, not private equity.
Nor does the European Parliament
Of course not. Eurobudget will pay.
The cost of MEP’s pensions is covered entirely from the European Union budget.
Surely the Bank of England would support investment in the UK equities and venture capital too?
“Gosh far too risky!”
Its pension fund has 67% of its asset invested in Liability Driven Investments (‘LDI’) (. Under LDI instead of focusing purely on maximizing returns, managers invest in bonds (such as UK gilts) or derivatives whose values move in tandem with the organization’s future payout liabilities). And the rest in a range of high-grade corporate bonds. In other words, no equities.
So why are all these governments encouraging (and even compelling) retail investors put their future at risk?
I can do no better than quote from an article from the CFA Research institute in 2025 by Sabastien Canderle, practitioner, lecturer and an author of books about venture capital, who is far more expert than I on the subject.
“As regulators move to open private markets to a wider investor base, the question is not whether retail access should be allowed, but whether the structure of these markets can support it. Illiquidity, opaque performance reporting, and misaligned incentives between fund managers and investors already challenge institutional participants. With fee structures built for scale and governance mechanisms that provide limited accountability, extending the model to smaller investors risks amplifying those weaknesses rather than democratizing opportunity”.
Of course, all the signatories of the Mansion House Accord and governments around the world may be right. If you think so and think I am wrong, good luck all you plucky punters! Let me know in ten years’ time.
