In March, BlackRock CEO Larry Fink said he’d like to see more individual investors get access to private assets that have long been “locked behind high walls, with gates that open only for the wealthiest or largest market participants.” That’s a tempting prospect for retail investors who’d like to get the same kinds of returns as billionaires and hedge funds. And private equity firms are increasingly eager to give ordinary Americans the chance to, as one investment platform puts it, “invest like the 1 percent.”
Yet the “democratization” of private markets comes with substantial risks for everyone involved, argues Amit Seru, a professor of finance at Stanford Graduate School of Business. Retail investors expecting transparency and liquidity from private markets are opening themselves up to valuation contagion, as he recently explained in Barron’s. And the influx of less savvy, risk-averse investors could draw the eye of regulators and lawmakers. “In trying to attract retail money, private equity risks becoming just another overregulated public market, Seru wrote in the Financial Times.
Despite such concerns, the PE rush is just beginning: On August 8, President Donald Trump signed an executive order making it easier for 401(k) plans to invest in private equity. In an exchange with Stanford Business, Seru, a senior fellow at the Stanford Institute for Economic Policy Research and the Hoover Institution, talked about this quickly growing market and its potential to become “a systemic risk machine.”
Why are private equity firms eager to attract more retail investors?
Private equity firms see a once-in-a-generation opportunity to tap a vast pool of fresh capital. The pitch is simple and seductive: Over the past two decades, U.S.-focused private equity (excluding venture capital) has delivered annualized returns near 15 percent, far outpacing most public-market benchmarks. For an industry that thrives on scaling assets under management, retail investors represent untapped demand — millions of retirement savers looking for higher yields in a low-growth world.
The “democratization” narrative adds political cover: If mutual funds, exchange-traded funds (ETFs), and real estate investment trusts opened once-exclusive markets to the masses, why shouldn’t private equity be next? The current regulatory climate, with leadership sympathetic to market-driven solutions, only fuels the push. The prize isn’t just new money; it’s locking in long-term, relatively stable commitments that can be leveraged for more deals and more fees.
What are the main arguments against “opening the floodgates” of PE to retail investors?
Private equity’s success depends on patient, locked-up capital insulated from the mood swings of public markets. Retail flows bring the opposite: liquidity demands, shorter investment horizons, and a political reflex for heavier oversight. Regulatory tripwires abound: Once retirement-plan investments exceed 25 percent of a fund’s assets, Employee Retirement Income Security Act (ERISA) rules apply, dragging in the kind of compliance costs and fiduciary constraints that sap agility.
Transparency is another fault line. Today’s private equity reporting is far lighter than mutual funds’, but retail access would invite SEC demands for quarterly valuations, governance boards, and public disclosures. Structurally, accommodating retail liquidity means either holding excess cash, diluting returns or selling assets in a downturn, triggering fire-sale dynamics that can spiral.
And retail investors lack the analytical firepower of pensions or endowments, leaving them exposed to the risks of high leverage, complex capital structures, and fee-heavy contracts. The irony is that by chasing retail dollars, private equity risks becoming the very thing it has long outperformed: another overregulated public market.
What is valuation contagion, and why is it such a risk for retail investors in private credit markets?
Valuation contagion occurs when a visible crack in one corner of the market undermines confidence across the entire asset class. In private credit, where net asset values (NAVs) are marked to opaque models rather than real trades, the danger is acute. If a related ETF, holding similar loans but trading in public markets, starts pricing at a persistent discount to its stated NAV, the market is effectively saying: “We don’t believe the marks.”
That skepticism doesn’t stay local. Limited partners rethink commitments, lenders tighten collateral terms, subscription lines get pulled. It’s not a liquidity run — it’s a credibility run — and in a model-heavy market, credibility is everything. For retail investors in private-credit ETFs, valuation contagion means the floor can fall out without a wave of redemptions or defaults. A pricing gap in one product can ripple through funding lines, capital raises, and even the solvency of related vehicles.
What are the particular risks of investing in private credit wrapped in ETFs?
The ETF wrapper promises daily liquidity; the underlying loans may take months or longer to sell in stressed conditions. This structural mismatch invites trouble the moment investors lose confidence. Persistent discounts to NAV become public billboards of doubt, telegraphing that internal marks may be out of step with reality. Behind the scenes, valuation processes often rely on third-party agents whose inputs are, in turn, supplied by the fund sponsors themselves — more echo chamber than price discovery.
Add in the opacity of informal “liquidity backstops” with affiliates, and you have an interconnected ecosystem where distress in one corner can cascade into others. Shared platforms, overlapping investor bases, and common financing channels magnify the spillover risk. For retail investors, the ETF format offers the illusion of safety and price transparency — until the structure itself becomes the transmission channel for a market shock.
Why is the lack of transparency a concern for retail investors in private markets?
Private markets run on trust in marks. Institutional LPs have teams of analysts to interrogate those marks, assess leverage structures, and model exit risks. Retail investors do not. Without equivalent access to portfolio-level detail, they are left taking sponsor valuations on faith. This is dangerous in markets where assets don’t trade, valuations are model-driven, and small shifts in assumptions can change returns dramatically. Regulatory disclosure for retail-facing vehicles would eventually catch up, but in the interim, the opacity leaves investors exposed to mispricing, underappreciated risk concentrations, and the potential for sudden value write-downs. For retail investors, the danger isn’t just volatility — it’s the slow build of hidden risk until it breaks all at once.
How could increased retail exposure to private markets alter the defining features that make them attractive to investors?
Private equity’s edge comes from its independence — its ability to deploy capital flexibly, take long-term bets, and avoid the quarterly earnings grind. Increased retail exposure threatens all of that. As retail allocation grows, so does political pressure to “protect” those investors. In stress events, that means bailouts, liquidity facilities, and — eventually — bank-like oversight. ERISA thresholds would be crossed, SEC rulebooks expanded, and stress tests imposed.
The result: a once-nimble industry forced into the same straightjacket that constrains public markets. If that happens, private equity will no longer be “private” in any meaningful sense; it will be another arm of the regulated financial system.
What kinds of policies could address the risks of private markets going retail?
The first step is sunlight. Regulators should require public disclosure of who the ETFs’ authorized participants are, their contractual obligations, and how NAVs will be calculated during stress — not just in calm markets. Cross-holdings between ETFs and affiliated private vehicles should be transparent to expose potential channels of contagion. Global stress tests should model real-world redemption pressure and counterparty risk, recognizing that these products operate across borders and share investor bases.
Structural fixes are also needed: tighter definitions of “liquid” assets, hard caps on illiquid holdings in retail-facing wrappers, and standardized gating mechanisms to slow redemptions before they trigger fire sales. Finally, a real-time, cross-border data infrastructure should track valuation gaps, leverage, and redemption flows, to stop regulatory arbitrage before it undermines the whole system. Without these safeguards, the industry’s retail turn could transform a high-performing, flexible asset class into a systemic risk machine.
This story was originally published August 19, 2025 by Stanford Graduate School of Business Insights.
