Harvard Scholar Warns of Risks in Opening Private Markets to Everyday Investors

TL;DR

Harvard scholar Benjamin Bates warns that opening private markets to everyday investors could lead to higher fees and lower returns, citing studies that show private funds do not outperform public market investments. This could have significant implications for retail investors looking to diversify their portfolios. Private markets have grown in recent years, with many companies choosing to remain private rather than listing on public stock exchanges like the NYSE or NASDAQ. This trend has led to a belief that the best investment opportunities are in private markets, while public markets are left with less desirable companies. However, Bates's study found that private funds do not earn higher returns than simple investments in public markets, such as the S&P 500 index, which has a market cap of over $28 trillion. Key facts from Bates's study include that funds open only to wealthy investors, such as those with a net worth of over $1 million, earned higher returns than those available to regular investors. For example, the private equity firm KKR, which has a market cap of over $30 billion, has been known to offer exclusive investment opportunities to its high-net-worth clients. Additionally, private funds may not be transparent about the risks involved, with smooth performance numbers that do not reflect the actual volatility of the investments. This can be seen in the performance of companies like Uber, which has a market cap of over $80 billion and has experienced significant price fluctuations since its IPO. What it means is that retail investors may be taking on more risk than they realize when investing in private funds, and may not be getting the best deals. With the SEC considering ways to open up private markets to retail investors, Bates is urging caution and calling for greater transparency and regulation. He suggests that private funds should be required to provide more accurate estimates of their values and to disclose their fees and risks more clearly. For instance, if a private fund is investing in a company like Airbnb, which has a valuation of over $50 billion, it should provide clear information about the potential risks and rewards of such an investment. As the SEC moves forward with its plans, it will be important to watch how it balances the need to protect retail investors with the desire to increase access to private markets.