Stephen Joel Trachtenberg, former president of my alma mater, George Washington University, liked to compare universities to vodka.
Mr. Trachtenberg was famous for dramatically raising GW’s tuition prices — in 2012, The Atlantic called him “the high priest of runaway college inflation” — and he wasn’t shy about explaining why. With universities, as with vodka, consumers will be choosing between essentially the same products, he told The Atlantic. He said the reason shoppers think products like Gray Goose are better than bottom-tier brands is simply because they’re more expensive, even though both products are basically tasteless.
The current state of the market makes me wonder if investors are also shopping in the vodka aisle. Some investments for wealthy investors have recently lagged major public indexes.
Consider a private equity fund that invests in privately held companies. Generally, you must be an accredited investor to purchase. This means your net worth, excluding your primary residence, must be at least $1 million, or your personal annual income must be over $200,000. These funds are proprietary and expensive, losing out to much cheaper options these days.
New York City-based investment firm Cambridge Associates’ Private Equity Index, which includes about 1,800 funds, returned 7.4% annually, net of fees, over the three-year period ending in March, according to a report released in August. Over five years, the index returned 9.3%. Funds that track the S&P 500 Index, on the other hand, are available to anyone and charge only a few percentage points to own, but they have returned 18.3% and 12% over three and five years, respectively.
So is private investment like expensive alcohol? Not exactly, experts say. However, if you’re interested in incorporating them into your portfolio someday, it’s important to understand the benefits and risks of owning them.
Advantages of owning private investments
Proponents of private investment typically tout two advantages over public markets. First, it means that you can expect higher returns in the long run. The same Cambridge Associates private equity index, which has lagged the S&P over the past three and five years, returned 12.8% annually through 2025, compared with a 10% return for the S&P 500, the investment firm said.
Second, private funds can do things that public funds cannot do, such as using debt to acquire companies or getting in on the first wave of investment opportunities before they go public. Investment experts say early-stage companies can offer greater investment upside and involve greater risk than more established companies.
“Private markets benefit from leverage on borrowing, illiquidity and access to early-stage investment opportunities,” said John Barranco, chief investment officer at Charlotte, North Carolina-based investment firm Allspring. “Most companies are fairly mature by the time they hit the market.”
Additionally, for investors who desire a broadly diversified portfolio, private markets offer another side of assets that fluctuate based on different factors than traditional public investments such as stocks, bonds, and mutual funds.
“I’ve always believed that unless you end up having a truly diversified portfolio in both public and private (markets), and both public and private, your portfolio is not optimal,” said Mitchell Caplan, CEO of Willow Wealth, a New York-based private investment firm.
In August 2025, President Donald Trump issued an executive order directing the U.S. Department of Labor and the Securities and Exchange Commission to facilitate expanded access to alternative assets, such as private investments in 401(k)s. The Labor Department proposed rules in March that would allow workplace plans to more easily include private market assets, but they have not yet been finalized.
The move was seen by some in the investment industry as a major win for retail investors. For example, BlackRock CEO Larry Fink argued in his 2025 letter to shareholders that “democratizing” private markets would give ordinary investors the same return potential currently enjoyed only by the wealthy.
However, the price threshold for owning these funds stems in part from the idea that these funds are complex holdings for sophisticated investors. That’s why market experts say you should consider the risks of owning a private investment, as well as the potential return factors, before investing. Especially since there are many different types of personal investments, it is wise to consult a financial professional before making any changes to your portfolio.
Know the risks of private markets
Although no two private investments are exactly alike, they tend to involve two notable risk factors that should be considered.
illiquidity
If you own a stock or bond mutual fund, it’s very easy to sell your shares if you need to. When you sell your portion of the portfolio, the fund ostensibly sells the investments you owned and gives you cash.
The same is not true for many private equity funds, which often have holding periods and limits on the amount investors can redeem. Barranco said the fund’s holding period may not match the timeline of when the money is needed.
“When it comes to vehicles being sold to retail investors, there are challenges around retail investors whose investment horizon is likely to be shorter than needed,” he says.
Fee
Not only do you generally need to be an accredited investor to get your foot in the door, but individual investing also tends to have higher fees than you would pay if you invested in mutual funds or exchange-traded funds.
In the traditional model, private equity funds may charge a 2% annual fee plus 20% of the fund’s profits above a certain threshold. “A lot of it has been compressed,” Kaplan said, adding that these days fees are more likely to be 15% on fund outperformance than 20%.
Still, for comparison, the index ETF’s annual expense ratio was 0.14% at the end of 2025, according to Morningstar.
And now interest rates pose a challenge for private equity. Private investment outpaced public investment from October 2012 to September 2022, when short-term interest rates were consistently low, according to Allspring data. However, from October 2022 to March 2026, the Bloomberg Private Equity Index lagged the S&P 500 by 18 percentage points amid rising interest rates.
“There was a time when we were able to generally take advantage of lower hurdle rates because capital was cheaper in the private market, but then we realized that we could turn that into a pretty good opportunity down the road,” Barranco says. “However, if interest rates rise in 2022, that situation will reverse.”
Even if interest rates remain high, private investment will not necessarily decline completely. Experts say this trend highlights the need to understand the risks and benefits of a particular private investment before purchasing it.
“It’s really important that consumers understand what that investment does, what the benefits are, and what risks are inherent in it,” Caplan says. “And doing it in plain English allows less sophisticated consumers to really understand what they’re investing in and why it makes sense in the creation of their overall portfolio.”
