MW You can finally invest like the 1% - use this stress test before getting locked into private markets
By Matt Malone
Private credit and other institutional investments are now within reach for individuals. But their promises don't always align with your portfolio.
Buying into a private-market fund isn't like buying a typical stock or bond fund. It requires real due diligence.
Illiquidity remains a defining feature of private markets. Even the most cleverly engineered product can only temporarily disguise it
The recent news related to liquidity in one of Blue Owl Capital's (OWL) non-traded BDCs has brought some of the challenges with semi-liquid alternatives into focus. While much has been said about an unhappy investor base, considering what was contemplated upfront for this type of vehicle, the actions are not out of line with the industry standard, meaning:
-- Investors should expect liquidity to be limited in times of stress - whether that is macro-driven or idiosyncratic (in Blue Owl's case it was a little bit of both, the macro "cockroaches" chatter combined with an idiosyncratic ill-fated merger plan).
-- Liquidating a large, illiquid portfolio in a short period of time is complicated - faster liquidity will inevitably lower returns for investors (the limited universe of buyers for positions in Blue Owl's OBDC II's portfolio knows Blue Owl is under pressure - which boosts bargaining power).
-- While offered pricing from professional third-party purchasers is much lower than stated net-asset value, what investors need to remember is these are financially motivated investors - they are looking for maximum long-term upside by purchasing from distressed holders.
Despite these pressures, the sale of a large portion of the portfolio effectively at par should provide some solace to investors waiting for liquidity. After all, it's called an illiquidity premium for a reason - there is no free lunch in financial markets.
Read: Hedge funds offer locked-up private credit investors a way out - at a hefty discount
The allure of private markets
Taking a step back, there are still excellent reasons for investors to pay attention to private markets. Once reserved for pension giants, endowments and the ultra-wealthy, private markets are now being reshaped and rebranded for a much broader audience.
Private equity, venture capital, private credit, private infrastructure and real-assets funds are being packaged into investment products marketed to accredited individuals, financial advisers and retail investors. From glossy fund decks to slick digital platforms, the message is simple: The gates are open.
This message is technically true. Over the past five years, dozens of new vehicles - interval funds, semi-liquid REITs, evergreen structures, non-traded business development companies - have launched with the promise of bringing the "private market advantage" to investors outside of the institutional sphere. These funds tout performance unaligned with the public markets, offering yield in a low-rate world and exposure to companies and assets that may never go public. These investments are easy to buy, require relatively low minimums and are backed by blue-chip asset managers and sophisticated fintech firms.
It all sounds very promising. But investors - especially those new to this part of the market - should be cautious. The proliferation of access is real. The tradeoffs are equally real, and far less well understood.
The trade-offs in semi-liquid alternatives
What fuels returns for institutions - long holding periods, customized deal structures and complex valuation methods - doesn't necessarily translate for retail investors.
With public companies going public later - or not at all - much of the most dynamic growth in the economy happens outside of the stock exchange. Between 2000 and 2023, the number of public companies in the U.S. shrank by more than 40%, even as the private markets swelled from a $2 trillion niche to greater than $13 trillion in assets under management, according to McKinsey.
Read: You're just getting scraps from the stock market. Here's where the big money is made.
In addition, Cerulli estimates that U.S. financial advisers have already allocated $1.9 trillion to less than fully liquid private-market strategies, and that figure is projected to almost double to $3.7 trillion by 2029 - creating a roughly $1.7 trillion growth opportunity in the years ahead.
Institutions with long time horizons - and the ability to withstand illiquidity - have benefited enormously. It's no surprise that individual investors are eager to follow.
New product structures aim to solve the central challenge: how to make inherently illiquid investments feel liquid. Interval and tender-offer funds allow periodic redemptions. Non-traded BDCs and REITs offer distribution yields. Evergreen funds allow continual fundraising and reinvestment, creating the feel of an open-end mutual fund, with access to private deals tucked inside.
But this sense of accessibility masks the underlying complexity. The same characteristics that fueled returns for institutions - long holding periods, customized deal structures and complex valuation methods - don't necessarily translate well for retail investors.
Underlying risks
Illiquidity remains a defining feature of private markets. Even the most cleverly engineered product can only temporarily disguise it. During periods of stress, liquidity promises tend to break down. This was vividly demonstrated in late 2022 and early 2023, when several large non-traded real-estate vehicles - including funds managed by Blackstone (BX) and Starwood $(STWD)$ - hit their redemption limits and pro-rated withdrawals.
Valuation methodology is another concern. Many private funds rely on quarterly marks determined by the managers themselves or by third-party appraisers. These valuations often lag the public markets by months and can be smoothed, giving the illusion of stability. That illusion can evaporate quickly in times of crisis when redemptions mount or the underlying assets reprice sharply.
Fees in private vehicles can also be significantly higher - and less transparent - than those in public-market products. Investors may face multiple layered costs: fund management fees, incentive fees (with or without hurdles), fund-of-funds fees and deal-level expenses.
In some cases these fees are justified and align management with investors - originating and managing private investments is inherently more time-consuming than trading stocks or bonds. But in other cases, managers may be taking advantage of unwitting investors.
Investors need to focus not only on net-of-fee returns, but also have a deeper understanding of inherent risk - the volatility used by public-market investors as a risk proxy is irrelevant in private markets. More appropriate measures involve understanding actual and structural leverage, legal framework and ability to access liquidity in times of stress.
Private markets belong in portfolios - but only after a lot of consideration
None of this is to suggest that private markets are inherently bad. Far from it. They may be a powerful addition to long-term portfolios, offering real benefits: access to differentiated strategies; returns with low correlation to public markets, and in some cases, better alignment with long-term goals than traditional stocks and bonds.
But given the challenges of complexity, illiquidity and higher fees, investors and their adviser need to bring a higher level of scrutiny and discipline. Buying into a private market fund isn't like buying a typical stock or bond fund. It requires real due diligence: understanding the investment strategy; the structure of the vehicle; the exit mechanics; the valuation policies; and the total cost of ownership.
It also means aligning expectations. Private funds may not produce steady, upward-sloping returns. They can disappoint. They can surprise. And they can be hard to exit when circumstances change.
A smarter approach
The future of private investing is not about turning every investor into an institutional allocator. It's about offering access with clarity. A more mature private market would mean:
-- Product providers disclosing clearly what the fund does, how it's priced, how (or if) investors can redeem and what they'll pay.
-- Advisers raising their game and acting with fiduciary discipline - just because a product is available doesn't mean it's suitable.
-- Regulators advancing uniform, investor-centric disclosures and standards.
-- Investors looking past headlines and hype to understand the real value (and tradeoffs) of what they're buying.
Private-market investments are not just another asset class - they are a different way of investing. They reward patience, research and selectivity. But they can punish those who mistake slick packaging for quality or easy access for safety.
Matt Malone, CFA, is the president and head of investment management at Opto Investments, a private markets solution serving fiduciary wealth managers, family offices and institutions. See related disclosures at https://www.optoinvest.com/disclaimers.
More: 'I'm shocked that people are shocked,' says JPMorgan executive about private-credit meltdown
Plus: This fund that now says it'll never open up for withdrawals has El-Erian making Bear Stearns parallels
-Matt Malone
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February 26, 2026 12:48 ET (17:48 GMT)
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