Opening Private Equity to Retail Without Destroying What Makes It Work
A guest post by Benjamin Forestier and Claudia Zeisberger
Private equity's retail expansion is the sea change that's been happening in asset management over the past decade.
And like Hokusai's famous woodblock, once you see the boats underneath, your mind can't help but wonder whether they are built to handle what's about to hit them.
A lot of brain cells were wasted on the debate around whether individual investors should have access. That boat has sailed (I’m full of terrible puns): access is rapidly “democratizing”. The better question is whether the vehicles being built for said retail investors still behave like private equity at all.
I’ve been writing about the structural downsides of evergreen vehicles for a while (the liquidity mismatches, the inflated IRRs, the layered fees, the fund-level opacity that leaves investors guessing at what they actually own).
Today's guest post pulls those threads together from a different angle. The authors, Benjamin Forestier, Affiliate Professor in Investment Banking and Private Equity at École Polytechnique, who trains professionals across PE funds, M&A, and leveraged finance teams in France and abroad, and Claudia Zeisberger, Professor at INSEAD, former KKR advisory committee member, and author of Mastering Private Equity, make this case: retail investors aren't being given private equity. They're being given something that looks like it.
The argument is for getting the design right, so that the product retail investors are buying still reflects the mechanics that make this asset class worth owning in the first place.
-Leyla
Before we get into it, a special thank you to the academics and students in the audience!
Private equity has been one of the most reliable wealth-creation engines of the last three decades. Now it is being opened to retail investors. The ambition is right. The structures, in many cases, are not and need work.
What is being sold as democratization is often something different: private equity redesigned for distribution, with illiquidity, patient capital, and aligned incentives gradually engineered out of the model. Private equity closed end funds work because of those constraints; they fit the underlying assets which are illiquid by design.
Why offer Retail investors a simplified version, rather than the real thing?
Illiquidity, misunderstood
Illiquidity is often framed as the main barrier to retail access. In practice, it is one of the reasons private equity works as an asset class in the first place. It allows investors to stay invested through cycles, gives companies time to execute, and removes the constant pressure of mark- to-market decisions. Institutional investors do not try to eliminate this constraint but build portfolios around it.
Retail structures have taken a different approach. Evergreen vehicles —which are open-ended structures that promise periodic redemptions while remaining invested in illiquid assets — are the most common form. At first glance the logic seems sound. In practice, it depends on market conditions holding. Liquidity in these structures is not absolute/ guaranteed ,it is managed and highly contingent on market conditions. This becomes visible when the cycle turns: If and when inflows slow and financing tightens, redemption requests increase at the same time as exit opportunities decline.
Primer on evergreens:
At that point, the structure is forced to choose: sell assets at a discount in a hurry or restrict liquidity. In most cases, gates typically follow to avoid forced sales at significant discounts.
What initially looked like flexibility starts to resemble a clear duration mismatch between assets (illiquid by nature) and liabilities (short-term redemption requests). Investors are holding long-duration assets while expecting short-term optionality, something that is difficult to manage in practice without gating mechanisms or holding cash buffers that dilute returns.
The irony is that many retail structures are attempting to manufacture liquidity from fundamentally illiquid assets. They are not eliminating the problem, they are simply relocating it into the fund structure itself. In benign markets this remains largely invisible. When markets become stressed, it reappears through gates, delayed withdrawals or forced asset sales.
The closed-end structure has endured for decades, and for good reason. Capital is committed, deployed over time, and returned when assets are realized. There is no promise of interim liquidity—and therefore no need to withdraw it later. For retail investors, this is less a constraint than a form of clarity. Illiquidity is easier to accept when it is clearly stated than when it is only visible in stressed conditions.
Here’s why you want to watch liquidity, and how to do it:
IRR is a number, not the full picture
IRR is usually the first number investors see, and the one most emphasized during fundraising. The difficulty is that it is highly sensitive to timing, which makes it relatively easy to influence without changing underlying performance.
Two tools are commonly used in fund financial engineering:
Subscription lines delay capital calls, effectively shortening the measured investment period.
NAV-based financing can generate early distributions without requiring exits.
In both cases, the result is a higher IRR. From an economic standpoint, however, very little has changed. The same assets are held, over the same horizon, with the same operational outcomes. What shifts is the timing of cash flows. Institutional investors adjust for this automatically. The advisors and private banks that direct retail and high- net-worth capital into these funds typically cannot — the data required to make that adjustment is rarely disclosed. The effect is economically modest but psychologically powerful. Investors can be shown stronger-looking performance numbers without any corresponding improvement in the underlying investments.
A more grounded approach is to look beyond IRR. Metrics like DPI and MOIC, particularly on a deal-by-deal basis, bring the focus back to realized outcomes and capital efficiency. Calling capital when investments are made and distributing cash when operational value creation is genuinely realized does not optimize presentation. It makes the numbers easier to interpret and easier to trust for non-qualified investors. Private equity should create value through better companies, not through better cash-flow choreography.
Same assets, same table
Access is often discussed as though exposure alone were enough. In private equity, however, the economics of the structure matter just as much as the assets themselves. Retail investors are frequently invested through feeder funds, funds of funds or parallel vehicles. These provide access to similar underlying assets, but not always under the same conditions. Differences can emerge in fees, governance, and visibility. They are not always obvious at the outset. Over time, however, they tend to accumulate.
Institutional investors, by contrast, typically sit directly in the main fund. They share the same entry price, the same reporting framework, and the same governance environment. Retail investors should not simply gain access to the same assets. They should gain access to the same economics. Whenever possible, capital should sit alongside the investors for whom private equity was originally designed: pension funds, endowments and family offices. Shared economics naturally create shared discipline. Pricing becomes easier to justify, reporting more consistent and incentives more transparent. When they do not, differences emerge gradually, but they do emerge. In private equity, alignment is less about intention than about structure.
And here’s how to do due diligence on GPs:
Seeing what you own
Private equity investors are owners of companies. Yet for many retail investors, that ownership can feel abstract. Reporting is often concentrated at the fund level, with limited detail on individual portfolio companies.
As a result, performance is understood in aggregate, rather than through the underlying drivers. Institutional investors approach this differently. They receive regular company-level information,not to manage operations, but to understand how value is being created. Retail investors do not need full operational visibility. But they do benefit from access to core information: revenue evolution, profitability, cash generation, and basic financials.
This information is already produced. The challenge is not availability, but how it is shared. Without it, performance tends to be interpreted through high-level narratives. With it, investors can follow progress more directly.
Opacity is often defended as an unavoidable feature of private markets. In reality, sophisticated institutional investors already receive much of this information. The question is not whether the information exists, but why it should stop at the retail gate. Transparency does not remove complexity. It makes it more tangible.
Ownership becomes easier to understand when it is visible.
Your best bet at gaining more visibility is reading the footnotes to financial statements. I know, for
allsome of us it’s a pain. Please do it anyway:
Fees in a lower return world
Fees have long been treated as a given in private equity. But they were designed in a different context when funds were smaller, competition was lighter, and return dispersion was wider. That environment has evolved. Funds are larger, capital is more abundant, and entry valuations are higher.
As a result, expected returns, particularly in certain segments, are under more pressure. In that context, fees take on greater importance. What used to be a secondary consideration becomes a meaningful driver of net outcomes.
For retail investors, the picture is often more complex. Access frequently comes through additional layers, each with its own cost. The combined effect is not always immediately visible.
Institutional investors, meanwhile, tend to negotiate. They benefit from fee adjustments through side letters, co-investments, and governance rights that improve overall economics. The result is a difference in net returns, even when underlying assets are similar.
Democratization should not mean creating additional layers of fees between investors and the underlying assets. If retail investors systematically pay more for essentially the same exposure, broader access risks becoming a transfer of value rather than a creation of value.
Much of the gap traces back to how products reach investors in the first place. In most markets, private banks act as distributors — compensated by the funds they sell, not by their clients. That is a conflict of interest. An advisor paid by the product is not advising the client. For the economics of retail access to improve, that incentive structure has to change.
A more balanced approach would reflect the current market environment. Management fees can scale with fund size. Carried interest can be more clearly linked to outperformance, with lower participation around the hurdle and stronger incentives for genuine excess returns.
Equally important, unnecessary layers could be reduced if regulatory thresholds for direct investing were revisited (reducing reliance on feeder and fund-of-funds structures). Fees rarely dominate the conversation in strong markets, but they compound over time. And in private equity, alignment is ultimately reflected in how value is shared between the GPs and the LPs.
Fund-of-funds warrant a special mention where fees are concerned:
Designing access without changing the assets
Private equity does not outperform simply because it invests in private companies. It has historically outperformed because its structure forces patience, alignment and long-term ownership.
Many of today’s retail products attempt to preserve the appearance of private equity while softening these constraints. Yet these constraints are not flaws in the model. They are the model.
Opening the asset class to a broader investor base is a worthwhile objective. But democratization should not come at the cost of redesigning private equity into something fundamentally different. Retail investors do not need a simplified version of private equity.
They deserve the real thing.
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This is a great analysis of the main issues. The distortion of the original form of organization (closed-end, success based compensation) into an asset gathering, high fee, access vehicle with illusory liquidity is the real issue. The industry will likely undergo a reorganization process similar to what front loaded, high cost mutual funds experienced after the ‘68-‘75 shakeout or the Wall Street model once fixed commissions disappeared and trading spreads declined by 95%. A high volume retail product should imply steadily declining fees and expenses, but the incumbent firms are currently extracting so much cash from the existing model that change will happen from the outside and only grudgingly.
Retail access to PE solves one problem and creates another. Liquidity expectations and illiquidity premiums don't stay in the same room for long.