Why we avoid retailized private equity funds

The best private equity funds don't advertise. They don't run marketing campaigns. They don't offer "ticker + CUSIP" convenience. They don't provide monthly liquidity or quarterly redemptions. And they certainly don't pay distribution fees to financial advisor platforms.

Yet over the past five years, we've watched private equity get retailized—packaged into interval funds, tender offer funds, and non-traded REITs with minimum investments of $25k-$50k and distribution through the same channels that sell managed mutual funds. The pitch is always the same: "Finally, access to institutional-quality private equity for everyone."

This is almost always a terrible structure for investors. Not because retail investors don't belong in private equity—some do—but because the economics of retailization fundamentally corrupt the alignment of interests that makes private equity work.

The economics of retailization

A typical institutional private equity fund charges 2% management fees and 20% carried interest on profits above a hurdle rate (often 8%). The general partner earns most of their money from carry—meaning they only get rich if investors get rich first.

When you retailize the structure, the economics change. First, you add multiple layers of intermediaries: a distribution platform (which takes 25-75 basis points), financial advisors (who receive 25-100 basis points of trails), and often a fund-of-funds wrapper (adding another 50-100 basis points). Before you even get to the underlying private equity investments, you're paying 1-2.5% annually to the distribution machine.

Second, offering monthly or quarterly liquidity requires maintaining cash positions or investing in more liquid (read: lower return) private credit instead of true buyout or venture capital strategies. You can't be locked into a 7-10 year fund lifecycle if you're offering regular redemptions.

Third, the cost of marketing to retail investors is enormous. Conference sponsorships, media placements, advisor education programs, branding campaigns—this isn't a $50M fund raising quietly from family offices, it's a $500M+ fund that needs to scale to cover its distribution overhead.

All of this comes out of investor returns. The managers get paid regardless—they're collecting fees on AUM. But the alignment of interests is broken.

Who these products actually serve

Retailized private equity serves three constituencies very well: the asset managers who earn recurring fees on permanent capital, the distribution platforms that collect basis points on AUM, and the financial advisors who get paid to sell the product.

It serves actual investors poorly. The return hurdles are opaque (often compared to public equity benchmarks rather than actual private equity), the fee disclosure is deliberately complicated (multiple layers disclosed separately), and the liquidity terms look good until you try to actually redeem during a market stress—when gates, holdbacks, and extended redemption queues suddenly appear in the fine print.

We've reviewed dozens of these structures. The common pattern: they underperform actual private equity during good markets (because of the fee drag and liquidity constraints), and they underperform public equities during bad markets (because redemption queues force sales into illiquidity or NAVs lag real marks).

The illusion of access

The marketing pitch emphasizes "access"—as if the main barrier to private equity returns was that institutional funds had minimum investments of $5M or $10M and retail investors couldn't get in.

But the real barrier isn't minimum check size. It's that the best funds are wildly oversubscribed and turn away even institutional investors. Sequoia, Silver Lake, Thoma Bravo, Vista Equity—these funds don't need to retailize. They could raise $10B in a week from existing LPs and still turn away capital.

The funds that do retailize are almost never the top-quartile managers. They're either new managers building a track record (who can't access institutional capital yet) or established managers whose performance has deteriorated (and who need new distribution channels because their existing LPs are dropping out).

There are occasional exceptions—a strong manager who sees permanent capital vehicles as a way to reduce fundraising cycles. But these are rare, and even when the manager is credible, the structure itself creates problems.

Misleading performance disclosures

Retailized private equity funds often show historical performance from the manager's institutional funds—which operated under completely different structures, fee arrangements, and liquidity terms.

A manager might show a track record of 18% net IRRs across four prior institutional funds, then launch a retailized interval fund with quarterly liquidity. But the 18% returns came from locked-up capital in 7-10 year fund cycles, investing in true buyout opportunities with high leverage and patient exit strategies.

The new structure can't replicate that. It needs liquidity for redemptions. It can't use the same leverage (regulators restrict borrowing in interval funds). It can't wait 7 years for exits. And it's paying an extra 1-2% annually in distribution costs.

The disclosed performance isn't technically fraudulent—there are disclaimers that "past performance doesn't guarantee future results" and that "the new fund operates differently than prior funds." But the marketing clearly intends for investors to believe they're getting access to the same strategy that produced the historical returns.

The liquidity mismatch problem

Offering quarterly or monthly redemptions on inherently illiquid assets creates a structural vulnerability. It works fine when inflows exceed outflows—new money funds redemptions. But when the market turns and redemption requests spike, the structure comes under stress.

At that point, the fund manager has three bad options: sell liquid assets first (leaving remaining investors holding increasingly illiquid positions), gate redemptions (revealing that the promised liquidity was conditional), or distribute illiquid securities in kind to redeeming investors (which is almost impossible for retail investors to handle).

We saw this play out in 2020 when tender offer funds in real estate and private equity suspended redemptions during COVID volatility. Investors who thought they had quarterly liquidity suddenly couldn't get out for 12-18 months. The funds eventually reopened, but the liquidity promise was exposed as conditional.

The irony is that traditional private equity funds with true lockups don't have this problem. There's no liquidity mismatch because there's no promised liquidity—investors commit capital for the full fund life, and the GP can focus on long-term value creation instead of managing redemption queues.

What we recommend instead

If you have $1M-$5M to allocate to private equity, there are better paths than retailized funds.

First, consider whether you actually belong in private equity at all. It requires long lockups, tolerating mark-to-market volatility in early years (the "J-curve"), and accepting concentrated risk. Many investors are better served by public markets.

If private equity makes sense, look for true institutional fund structures where you can meet the minimums—typically $250k-$1M for smaller funds or emerging managers. These operate with proper alignment: long lockups, performance-based fees, and no retailization overhead.

For exposure to specific industries or transaction types, direct co-investments alongside institutional funds often provide better economics than fund-of-funds structures—though they require more sophisticated due diligence.

And finally, recognize that not having access to Sequoia or Silver Lake doesn't mean you're missing out on alpha. Most investors are better off building diversified public portfolios and accessing private markets selectively through specialist managers in specific niches—not through retailized products marketed as "democratizing private equity."

The retailization of private equity is a solution looking for a problem. It serves the financial industry's distribution machine, not investors seeking actual private equity returns. When you see aggressive marketing, retail-friendly minimums, and monthly liquidity promises—that's a signal to look elsewhere.