In the history of every great catastrophe, you will find some masterly bit of stupidity set fire to the oil-soaked rags.[1]
—EDWIN LEFEVRE, author of Reminiscences of a Stock Operator
Private markets have entered what may be the most precarious phase of a decades-long speculative cycle, defined by questionable valuations, governance concerns, and aggressive marketing to retail investors. While institutions have already committed trillions to these opaque vehicles, many are now quietly heading for the exits — just as individual investors are being drawn in by the promise of stable returns and enhanced diversification.
Yet the warning signs are piling up. From valuation inflation to fee extraction on unrealized gains, today’s market bears striking resemblance to the late stages of past financial manias. This post draws heavily on more than two centuries of US financial history to show how those patterns are resurfacing in private markets.
Consider, for example Jason Zweig’s June 6 Wall Street Journal article, which raised serious questions about valuation practices at Hamilton Lane Private Assets Fund. In it, Zweig interviews Tim McGlinn, owner of The AltView, whose work continues to be a valuable resource for those interested in the structural dynamics of private markets.
Zweig revealed Hamilton Lane’s use of a valuation methodology that enabled the Private Assets Fund to record generous mark ups on secondary investments — often within days of purchasing them. According to the article, the fund recorded significant markups shortly after acquiring positions — a method akin to purchasing a home for $1 million and then marking it up to $1.25 million based on an external estimate. Such a move, while not unheard of in private markets, may result in perceptions of artificially boosted returns.
Yet, despite already earning a 1.40% annual management fee on nearly $4 billion in assets under management (AUM), Hamilton Lane proposed a notable change in March 2025: Shareholders were asked to waive the fund’s 8% preferred return hurdle and allow for the distribution of incentive fees on unrealized gains. This change resulted in a $58 million payment to management, a figure that appears to be heavily supported by the earlier described valuation approach.
The motivations behind shareholder support for such a revision are unclear. However, the governance implications are significant. The move suggests a broader trend worth watching in the current market environment — one in which investor protections may be subordinated to fee extraction. McGlinn and Zweig‘s work underscores the need for vigilance and transparency, especially as private markets evolve to attract new classes of investors.
While the Hamilton Lane Private Assets Fund targets individual investors, the underlying valuation and incentive dynamics mirror those seen across segments of the institutional private markets landscape.
The Rhythm of History Can Be Felt in Private Markets
Zweig’s article was unnerving but hardly surprising. This kind of behavior is typical in the late stage of a speculative cycle, and the United States has experienced many over the past 235 years. The first one occurred in 1791 when frenzied traders speculated in “scrip” granting them options to purchase shares in the initial public offering of stock in the First Bank of the United States. Americans have since experienced many more manias and crashes. Each episode felt unique at the time, but viewed across centuries, a familiar pattern emerges. In 2025, there are clear signs that this pattern is repeating in private markets — and that we’ve entered its most dangerous late stage.
So, how did this happen? Private markets, which include investments such as venture capital, buyouts, real estate, hedge funds, and private credit, were all the rage among institutional investment plans over the past two decades. Mesmerized by the exceptional returns of the Yale University Endowment at the turn of the 21st century, trustees began shoveling substantial amounts of capital into these markets. Multiple red flags steadily emerged, but they were largely hidden by the slow passage of time.
Today, there are seven red flags which strongly suggest that private markets are in the late stage of a classic speculative cycle. At best, this means they are severely overvalued; at worst, it means that at least some segments may qualify as a bubble.
Signs of Late Stage Speculation: 7 Red Flags in Private Markets
Red Flag #1: Widespread Acceptance of a Flawed Narrative
There is no national price bubble [in real estate]. Never has been; never will be.[2]
—DAVID LEREAH, chief economist of the National Association of Realtors
Beneath the foundations of history’s worst bubbles were widely accepted narratives that ultimately proved to be dead wrong. In the 1810s, American farmers believed that wheat and cotton prices would remain at astronomical levels for many years. In the late 1920s, Wall Street speculators believed that using short-term debt to purchase stocks was safe because the markets would never suffer a sustained decline. In the late 1990s, Americans believed that any company with a “.com” placed after its name offered a sure path to riches. In the early 2000s, Americans believed that real estate prices would never decline on a national level.
In the 2020s, it seems almost every institutional and individual investor believes that private markets offer a foolproof way to enhance returns and/or reduce portfolio risk. Few question the validity of this narrative despite mounting evidence that not only is it unlikely to be true in the future, but there is also strong evidence that it failed to materialize in the past.
A paradox of investing is that speculative excesses happen only when most investors believe they can’t happen. It is reminiscent of a famous scene in the movie The Usual Suspects, when a shadowy villain Keyser Söze explained how the myth of his existence enabled him to achieve maximum surprise. After completing his crime spree, Söze ended the movie by declaring, “The greatest trick the devil ever pulled was convincing the world he didn’t exist.” Speculative episodes thrive under similar conditions.
Red Flag #2: Presence of a Complacent and Siloed Supply Chain
What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions?[3]
—MICHAEL LEWIS, author of The Big Short
A few years before the Global Financial Crisis (GFC) of 2007 to 2009, a handful of investors including Mike Burry and Steve Eisman placed large bets on the potential collapse of securities tied to the real estate market. The real estate bubble in the early 2000s was extremely difficult to detect because it was visible only to a small handful of people who understood each segment of the real estate and mortgage-backed security supply chain. Even the most vocal real estate skeptics usually failed to appreciate the full scale of the problem because they only understood a few segments.
People like Burry and Eisman were exceptions. They saw how individuals with no real estate experience were using massive amounts of debt to indiscriminately buy properties with the sole intention of flipping them for a quick profit. They saw how mortgage lenders were motivated only by sales volume, which led them to issue loans with little regard for the borrower’s ability to pay. They saw how investment banks purchased and repackaged these loans into risky products that were nevertheless rated triple-A. Finally, they saw how lax ratings agencies, specialized insurers, GSEs, and the financial media reinforced the faulty narrative, giving speculators a false sense of security. Figure 1 shows how this supply chain worked.
Figure 1.
Source: Investing in U.S. Financial History: Understanding the Past to Forecast the Future (February 2024).
On the surface, the supply chain in private markets looks quite different, but it is similar in the sense that each segment adds incremental risk, and few investors appreciate how these risks compound as products move along the assembly line. Moreover, participants in the supply chain are so hyper-focused on extracting value from their segment that they have little care for the risks embedded in the products that pop out at the end.
Rather than focusing solely on the end recipients of capital flows, however, attention should be directed further upstream toward the mechanisms and decision-makers that enable such behaviors to persist unchecked. This is why I believe a critical, yet often underexamined, link in the private markets supply chain lies with investment consulting firms and investment plan staff. For more than two decades, many have encouraged trustees to steadily increase private markets allocations, often beyond what long-term objectives or market conditions justify. In some cases, these recommendations have relied on optimistic return assumptions, cursory due diligence, and incentive structures that may not align with beneficiaries’ long-term interests.
Importantly, these entities tend to operate with limited regulatory oversight. These dynamics were central themes in a presentation I delivered at CFA Institute LIVE 2025 in Chicago and discussed in greater detail in my interview with Lotta Moberg, PhD, CFA, on the Enterprising Investor podcast. Figure 2 highlights how these actors fit into the broader institutional investment plan supply chain.
Figure 2.
Red Flag #3: Large, Indiscriminate Capital Inflows
An Aristocracy of Successful Investors’ advertised a new guide to investment. The headline read: “He made $70,000 after reading, “Beating the Stock Market.” No doubt whoever it was did. He might have made it without reading the volume or without being able to read.[4]
—JOHN KENNETH GALBRAITH, author of The Great Crash 1929
Fundamentally, an asset bubble is nothing more than a colossal imbalance of supply and demand. The resulting scarcity of attractive investment opportunities causes prices of sound investments to rise to unattractive levels and compels fund managers to allocate the excess to unworthy investments and/or outright frauds. Eventually, a critical mass of investors awakes to this reality, capital flows reverse, and the speculative cycle ends with a crash.
The flood of capital into private markets has persisted for more than two decades. It began soon after the late CIO of the Yale Investments Office, David Swensen, published Pioneering Portfolio Management in 2000. Followers assumed they could improve their performance by bluntly allocating to alternative asset classes. Few paused to consider the fact that Swensen was both uniquely talented and early to enter these markets. Replicating his performance was never likely for the masses. Nevertheless, by 2010 AM in key private markets was increasing at more than 10% per year. Figure 3 shows the total AUM of three major private markets (private equity, hedge funds, and private credit). Then, Figure 4 shows the rapid growth of public pension plan allocations, which was a significant driver of AUM growth.
Figure 3: Private Equity, Hedge Fund, and Private Credit AuM ($Billions).
(2010-2024)
Source: Prequin.
Figure 4: Average Public Pension Plan Allocation to Alternative Investments (%) (2001-2023).
Sources: Equable (2024).
Red Flag #4: Unbalanced Media Coverage
You have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can’t make money for you anymore, and that is all that matters. We don’t use price-to-earnings multiples anymore…If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn’t have a dime under management.[5]
—JIM CRAMER, host of Mad Money (February 29, 2000)
Today, mainstream financial coverage tends to emphasize the accessibility and growth potential of private markets, often with limited scrutiny of valuation practices or systemic risks. This consensus-driven approach can reinforce overly optimistic narratives and accelerate momentum in late-stage speculative cycles. This phenomenon is common in financial history. For example, Figure 5 shows the reaction of the media to a warning voiced by Roger Babson, a renowned businessman and economist on September 5, 1929. The stock market crashed, and the Great Depression deepened less than two months later.
Figure 5.
Source: “Financial Markets.” The New York Times. (September 9, 1929), 34.
Red Flag #5: Stealthy Flight of Smart Money
Once a majority of players adopts a heretofore contrarian position, the minority view becomes the widely held perspective. Only an unusual few consistently take positions truly at odds with conventional wisdom.[6]
—DAVID SWENSEN, late CIO of the Yale Investments Office
In 1928 and 1929, a handful of astute investors, such as Bernard Baruch, Joseph Kennedy, and Charles Merrill, sensed the market had become completely detached from reality, and they sold most of their holdings in US stocks. But if they dared to share their opinions, they were subjected to ruthless ridicule. In 1928, it took multiple visits to a psychiatrist before Merrill regained confidence in his sanity. Of course, when the October 1929 crash arrived, Merrill, Baruch, and Kennedy were vindicated, but it was tough going in the meanwhile.
On April 17, 2025, Secondaries Investor reported that the Yale Investments Office was exploring the sale of up to $6 billion in private equity investments, which would constitute roughly 30% of Yale’s total holdings in private markets. Secondaries Investor also stated that this transaction would constitute the endowment’s first known secondary sale. Yale confirmed the potential sale but refused to specify the target amount. On June 5, 2025, Bloomberg reported that Yale was nearing a deal to close a sale of $2.5 billion of its venture capital portfolio.[7]
While it’s possible that recent funding changes for Ivy League institutions played a role, the scale and timing of Yale’s potential sale suggest that other factors like liquidity management or a reassessment of valuations may be the more significant drivers. Yale pioneered investments in private markets in the 1980s, but capital was in short supply and attractive opportunities were more plentiful at the time. The opposite is true in 2025. The Yale Investments Office is widely regarded as one of the more astute investors, which makes it plausible that their proposed sale of private equity is a dash for the exit.
Red Flag #6: Aggressive Sales to Retail Investors
The most notable piece of speculative architecture of the late 20s, and the one by which, more than any other device, the public demand for common stocks was satisfied, was the investment trust or company. [5]
—JOHN KENNETH GALBRAITH, author of the Great Crash 1929
Starting in the early 1900s, it became common for speculative cycles to end after Wall Street firms exhausted the funds of the last and most vulnerable cohort of capital providers: retail investors. By the late 1920s, the most common vehicle used to extract capital from retail investors was the investment company, now more commonly referred to as a mutual fund or 40-Act fund.
Over the past 25 years, private markets were largely reserved for institutional investment plans and ultra-high-net-worth investors. But as is always the case in speculative cycles, overly enthusiastic investors eventually flooded the market with excess capital. The classic cycle of overbuilding and malinvestment ensued. According to a June 2 Wall Street Journal article, a backlog of approximately 30,000 companies now sits on the balance sheets of private equity firms. The prospect of exiting these investments at acceptable prices is daunting.
Over-allocated institutional investment plans and private fund managers are now desperately seeking exits, which helps explain their sudden interest in bringing private markets to retail investors. Once again, a vehicle of choice is the 40-Act fund. Heavy marketing to retail investors has led to massive inflows into evergreen funds with fancy names, such as interval funds and continuation funds (see Figure 6).
Figure 6: Growth of Evergreen Funds ($ Billions) (2015-2025est).
Sources: Pitchbook, CapGemini World Report Series 2024 (January 2025), Hamilton Lane.
Red Flag #7: Sudden Loss of Confidence in the Narrative
Human nature being what it is, small loopholes are likely to be exploited until they become big ones, and big ones until they turn into financial disasters.[8]
—SETH KLARMAN, owner of Baupost Group
Speculative cycles end when a critical mass of investors suddenly lose faith in the flawed narrative on which it was based. This was a factor in the late 1920s when speculators failed to realize that corporate earnings were being padded by interest earnings on call loans that the companies issued to speculators, who then turned around and used the loans to purchase stock in the very same companies that issued them. When the Great Depression began, demand for call loans dried up, and companies suffered from lower demand for their products and the evaporation of interest income on call loans.
In this context, Zweig’s article may serve as a valuable warning. Whether the valuations represent isolated practices or broader systemic issues remains to be seen. But the questions raised deserve a closer look by all participants in the capital markets ecosystem.
This is the Place to Stop the Trouble
It is easy enough to burst a bubble. To incise it with a needle so that it subsides gradually is an operation of undoubted delicacy.[9]
—JOHN KENNETH GALBRAITH, author of the Great Crash 1929
Source: “Aid Trust Co. of America.” The New York Times. (October 23, 1907), 1.
Researching the 235-year financial history of the United States trained me to never ignore the red flags that typically signal the approaching end of a speculative cycle. Over the past few years, I have often wondered whether a compelling voice of reason in 1927, 1997, or 2003 could have prevented the bubbles and crashes that followed.
In 2025, it remains unclear whether the surge of capital into private markets constitutes a full-blown bubble, but the accumulation of red flags strongly suggests that extreme caution is warranted. The sheer volume of capital — combined with extraordinarily high fee structures relative to traditional asset classes — may significantly impair future returns. In this context, the cost of staying on the sidelines seems to pale in comparison to the risks of participation.
Retail investors should approach these increasingly accessible vehicles with a clear understanding of their true purpose and risks. It seems highly likely that, in general, these vehicles are viewed as acceptable exit routes for institutional investors but are likely to constitute unattractive entry points for retail investors. This is not a scenario that investors should take lightly if advisors present them with opportunities to enter these markets.
The views expressed in this article are solely those of the author, Mark J. Higgins, CFA, CFP, and do not necessarily reflect the views, policies, or positions of Index Fund Advisors (IFA) or its affiliates. This article is intended for informational purposes only and is not intended to provide investment, financial, legal, or tax advice. Readers are encouraged to consult with qualified financial professionals before making investment decisions tailored to their individual circumstances.
The examples and critiques discussed in this article, including references to practices within private markets and specific funds, are based on publicly reported information from third-party sources. These examples are included for illustrative purposes only and have not been independently verified by the author. The inclusion of such references does not constitute an endorsement or criticism of any entity by IFA or the author. Readers are encouraged to review the original sources for further context.
While this article highlights potential risks and concerns within private markets, investment decisions regarding these assets should be made based on a thorough review of one’s financial objectives, risk tolerance, and market conditions. Investing involves risks, including the potential loss of principal. Past performance is not indicative of future results, and speculative cycles discussed in this article may not represent future outcomes.
[1] Edwin LeFevre, “The Game Got Them: How the Great Wall Street Gambling Syndicate Fell Into Its Own Trap,” Busy Man’s Magazine, February 1, 1908.
[2] Holden, Lewis, “Experts: No Real-Estate Bubble Burst,” Chicago Sun-Times, September 10, 2004.
[3] Michael Lewis, “The Big Short: Inside the Doomsday Machine.” (New York: W.W. Norton, 2011).
[4] John K. Galbraith, The Great Crash 1929, (Boston: Houghton Mifflin, 2009).
[5] John K. Galbraith, The Great Crash 1929, (Boston: Houghton Mifflin, 2009).
[6] David Swensen, Pioneering Portfolio Management, 2009 ed. (New York: The Free Press, 2009).
Zhang, Hannah. “Yale Sells Up to $6bn of Its PE Portfolio Amid Federal Funding Challenge.” Secondaries Investor. (April 17, 2025)
[8] Seth A. Klarman, “Blundering Down Wall Street,” The Washinton Post, November 24, 1990.
[9] The Great Depression: Can It Happen Again? 96th Cong. (1979) (Testimony of John Kenneth Galbraith). https://www.jec.senate.gov/reports/96th%20Congress/The%20Great%20Depression%20-%20Can%20It%20Happen%20Again%20(978).pdf
