Private Equity for All: The Paradoxical Push to Democratize Private Markets

Efforts to open private equity and other private assets to retail investors—including now through 401(k) plans—are often framed as a long-overdue democratization of superior investment opportunities. Indeed, private equity has long been viewed as special, both for its market-beating returns and its success in making companies more profitable, yet it has historically been off-limits to retail investors.

This Article argues that the push to democratize private equity is subject to a glaring paradox. The democratization narrative has it backwards: retailization erodes private equity’s famed advantages in investor performance and corporate efficiency, while subjecting retail investors to new risks and imposing burdensome new constraints on the private markets. Expanding access undermines the very benefits that access aims to deliver and the very features that purportedly make private equity special, with adverse economic effects as the private markets become less efficient.

The debate has become urgent. Private asset managers are hard at work selling products that thread the needle of the securities laws to target retail investors, while the executive branch is pushing for private assets to be included in Americans’ 401(k) plans. Steering retirement savers away from low-cost index funds toward products that mask high fees and illiquidity and yield vastly disparate outcomes represents a step backwards in the design of our retirement system, an unearned windfall for private asset managers, and a loss for long-term economic performance.