It’s Getting Easier to Invest in Private Assets. What Does That Mean for Investors?

Margaret Giles: Welcome to Investing Insights. I’m your host, Margaret Giles. Fund companies are looking to make private assets available to everyday investors, but investing in private companies comes with its own set of risks. Morningstar’s 2025 Outlook covers the convergence of public and private markets and highlights the pros and cons of this trend. Jack Shannon, a senior manager research analyst for Morningstar Research Services, is here to break down what products are available to retail investors interested in private assets. Plus, we’ll discuss the challenges and opportunities for investors and what the future might have in store.

Well, thanks for being here today, Jack.

Jack Shannon: Happy to be back.

What Are Private Assets?

Giles: All right. So before we get into anything, I want to start with the basics. What are private assets?

Shannon: So private assets, I think the easiest way to think about it is basically how the SEC in the United States use it. So any security in the United States has to either be registered with the SEC or be exempt from registration. When you’re registered with the SEC, that means you have to do quarterly filings, you have to do annual reports, you have to disclose a lot of information to the public. The reason you don’t have to, the reason you can be exempt from it is if you’re only, say, raising money from accredited investors and then you can be exempt from it. And so generally when we’re talking about private assets, we’re talking about securities that are exempt from public registration. On the equity side, it’s pretty cut and dry. It’s do these shares trade on a national exchange or not? And if they don’t, it’s private equity. The credit side’s a bit more blurry because technically loans are not considered securities. And so while private credit are loans to small and medium-size businesses—generally speaking when we’re talking about in the industry—large syndicated loans do have an active trading market in a sort of established ecosystem. And most public asset managers won’t really consider that private credit even though they’re kind of the same thing. So it’s a bit of a spectrum, a blurry spectrum on the credit side, and the equity side it’s a little more cut and dry.

Risks of Private Assets vs. Public Assets

Giles: Got it. So you’ve already, I think, mentioned one of those risks, which is a lack of disclosure. But what are the main risks associated with private assets versus public assets?

Shannon: So there’s the disclosure and data piece, which I think is very important because if you’re an investor, you want to know what is this company’s business? Are they making money? So you’re not going to necessarily have that on an unregistered security. The bigger issue, though, I think is the liquidity. So these are not actively traded. And so if you’re a fund manager who needs to trade a security and there’s no active exchange to do it on, how are you going to do it? You have to call a broker, you have to leverage your own network and when you want to sell something, are you going to have to take a big discount on it? When you want to buy something, do you have to pay a big premium on it? Without sort of active markets, it’s hard to say what those spreads would really be. There’s also the valuation piece where if you’re a fund manager, you have to say what you think these securities are worth. Now there’s a perverse incentive built in here where the asset manager makes money on assets under management, on a fee charged on that. And so if the person charging the fee is also the one getting to determine the asset level, there is a potential for abuse.

I don’t think we’ve seen any egregious abuses of it, but the risk is certainly there. And then you also have, as a fund holder or an investor, and you want to buy or sell shares of a privately held or a private asset fund, you have to pay the NAV, usually. And those NAVs are again based on those valuations. So if the NAV is overstated or understated, you could be getting a good deal, and you could be getting a bad deal. It just sort of depends on the directionality of those valuations and how off they may or may not actually be.

Giles: All right. So if due to that kind of lack of information, you might not know whether you’re getting a good deal or a bad deal, right?

Shannon: Right. Since there’s no active market, you don’t really know what the market consensus or the fair value would necessarily be on a given security. And so if you don’t know that, you just kind of have to take the fund company at their word and hope they’re an honest group.

Why Fund Companies Want to Give Retail Investors Access to Private Assets

Giles: Got it. So it seems like fund companies are really interested in getting private assets into the hands of more retail investors. Where does that interest come from?

Shannon: It mostly comes from a return story. So I think over the last decade, you’ve seen in the press, the financial press, a lot of discussion about how great private equity and venture capital has been for like university endowments and for pension funds. And I think people see that and say, like, hey, how come these big institutions and these high-net-worth credit investors have access to something, this great asset class that I don’t have access to? And I think there is, I think there’s a good strain of like, hey, let’s get this in the hands of everybody. I don’t think access is a bad thing. But I do think that like a lot of the reported returns that people see are IRRs, which is a perfectly reasonable thing to do to measure a fund’s performance, but it will be very different in a sort of public vehicle. So the way a venture capital and P/E fund traditionally works is they get capital commitments from people, but it doesn’t necessarily mean they take the money all at once. They’ll call the money from investors when there’s a deal they want to execute. And so the returns are based off the timing of the inflows and outflows of cash into the fund. But with a lot of funds we’ll talk about today, they’re taking your money upfront. And so they have to use that money immediately or have it parked in cash or parked in government Treasuries or whatever it might be. And so sort of by definition, you should probably expect lower returns in a sort of continuously offered vehicle than you would in a traditional VC or P/E fund.

Giles: Makes sense. And real quick, IRR stands for?

Shannon: Internal rate of return.

How Investors Can Access Private Assets Today

Giles: Thank you. So what are the options available to retail investors that want to get into private assets today?

Shannon: The first one is the old-fashioned mutual fund. So it’s your grandpa’s mutual fund. That’s an open-end fund in the industry parlance, but they can invest up to 15% of their assets in illiquid securities. So illiquid securities by the SEC’s definition is anything that can be sold or anything that can’t be sold in seven days or fewer. So there are plenty of mutual funds out there that we cover that own startups, that own SpaceX, and a lot of those big unicorn companies. But they’re usually, 50% is a limit. We don’t usually see it get up to that level. It’s usually maybe 5% to 6%. So I think first investors need to ask themselves, how much private exposure do I want? If you want just like a little bit, mutual funds could be a good option for you because there’s going to be some funds out there that give you private exposure on top of the domestic equity exposure that they have throughout the rest of the portfolio. So that’s one option. The other options are all different forms of closed-end funds. So there is the exchange-traded closed-end fund, which is like the DXYZ example that I’ve talked with Ivanna in the past about this.

Listeners can go back and watch that episode. But that is a fund that raises money, invests in startup companies, and then trades on an exchange. So the risk with those kind of funds though is you’re not paying the NAV when you transact. You’re paying a market price. And in the case of DXYZ, the NAV is like, I don’t know, $5, $6 and it’s trading at $60. So you’re paying 10 times what the fund company is telling you the portfolio is worth. I don’t think I would necessarily advise somebody to pay 10 times what something is fairly valued at. So that’s the risk with those exchange-traded closed-end funds.

There are interval funds, which are, again, a closed-end fund. They’re continuously offered. The way they’re a bit different is they will only allow a limited amount of redemptions per quarter usually, so 5% to 25%. But they can invest however much as they want in private assets. They can have 100% private portfolio. The trade-off is you may not be able to … if everyone heads for the exits at once, the fund probably won’t be able to meet all the redemptions at once. And so there’s a risk to an investor’s personal liquidity in terms of getting out of the fund. And then finally, there’s business development companies, BDCs, which are a lot like interval funds. They have a bit of a functional difference in terms of how much leverage they can use and what sort of companies are eligible to be included in them. But for all intents and purposes, they’re pretty similar.

Why Funds Choose Private Credit Instead of Private Equity

Giles: Got it. So I’ve read that most funds opt for private credit instead of private equity. Can you explain why that is?

Shannon: Credit is naturally more liquid than equity. And the way I explain it to people is think about, like, if you own a house, think about your mortgage. Me and my wife, we bought a house, got a mortgage, did a big renovation project. We went to a mortgage company. We don’t care who the mortgage company is, give us the lowest rate. That mortgage company then sells that debt to God knows who—I assume a Fannie or Freddie Securitization Pool. But to me, the borrower, I truly do not care who owns my debt. All I know is I have to log in to a servicers online portal, pay my mortgage payment every month. And I wipe my hands of it. However, if someone had told me, hey, you have to get equity financing for your house, someone’s going to give you a bunch of money, but they’re going to get a 20% stake in the ownership of the house, I would say, well, it doesn’t sound like a great idea. Because all of a sudden, they’re going to have ideas on like, hey, we shouldn’t put that bathroom there. We should put the bathroom there or like, hey, I don’t like that paint color.

So startups in the private equity venture capital side of things, startups are very cognizant of who they let be their owners, because they don’t want meddling people coming in trying to dictate strategy. And so they have a lot of sort of structural restraints against trading. They have right of first refusal on a lot of secondary trades of their shares. They have veto rights. So, we’ve heard anecdotes from fund managers, mutual fund managers who have tried to trade private company shares, where the private company, the startup said, no, you can’t do that. So there are just some structural issues on the equity side that I think means it’s going to be a lot harder to execute a private equity or venture capital strategy in an interval fund or any kind of fund then in a private credit strategy.

Why Companies Stay Private

Giles: Makes sense. It seems like private companies are private for a reason, right? They don’t want all these shareholders dictating what they do.

Shannon: Right, right. There’s plenty of benefits to being private. You don’t have the quarterly pressure of having to do the earnings calls and having all these people ask you, hey, what’s your earnings per share going to be next quarter? I also think that in terms of why companies are staying public or staying private for longer? Another issue is usually founder and employee liquidity. So if all my money is in this company that I work for, I kind of need an IPO—traditionally, you would need an IPO in order to cash out, to get money to be like, OK, now I can invest it somewhere else and I don’t have all this single concentrated portfolio of my life savings.

Now there are secondary exchanges that have popped up that allow for insiders and founders to be able to trade some of their equity. And so they’re able to get, I think there’s a bit wider avenues now to be able to get liquidity for employees or founders than maybe 15 or 20 years ago. And so that sort of liquidity need on a personal sort of human level, I think is a bit lower than maybe it was. And so that’s also why you might see companies staying private a bit longer. And then also if you’re able to keep raising money at $60, $50, $100 billion, why go to the public market? You don’t need to. And so I think that the appetite that investors have shown to keep funding some of these companies that like higher and higher valuations is another reason why we’re seeing a lot of them stay in the private sidelines.

How the Lack of Liquidity in Private Assets Plays Out in Interval Funds

Giles: OK, so looking back to the options available to retail investors, so let’s take interval funds for example just to keep it narrow. How would the lack of liquidity that private assets have play out in an interval fund? There’s restrictions that you kind of mentioned of when you take your money out, but I imagine there’s also potentially some issue in the front end where you’re funding and maybe they can’t invest in those private assets right away.

Shannon: Yes, that is a big issue that needs to be solved. So like I said, that’s one of the reasons why I think like the reported IRRs that you see in private equity and private venture capital are not necessarily what you’ll see in a fund like these where they’re continuously offered. But there have been some interesting things going on. So like on the credit side, we’ve seen some funds basically establish a warehousing agreement with a third-party private credit originator where this third party is going to warehouse all these loans. And so should the fund get a bunch of inflows, the fund manager has this warehouse of loans on the side that they can then go to and say, all right, give me this credit, we can now put that money to work. So I think on the credit side, I think there’s always going to be enough credit to make it doable. I don’t see it as a huge risk on the credit side. The equity side, it probably will be, because again, the startups don’t like free trading of their shares. And so if they don’t like free trading and you can’t really find anything on the marketplace, you’re kind of beholden to fundraising rounds and when are companies raising money, and is that going to coincide with when you collect money? That’s sort of TBD. So we’ll see how that plays out on the equity side. I think on the credit side, they found some interesting solutions, and I think it’s a relatively tame risk on the credit side. But on the equity side, it’s a problem.

How Funds Provide Exposure to Private Equity

Giles: OK. Can you talk a little bit more about the equity side? I’m interested in how do funds provide exposure to private equity? It seems difficult to just even get in. There’s resistance from the companies themselves, and what are those challenges? What do they look like?

Shannon: So there’s a couple of ways that they generally do it. There’s basically two main avenues. One is you either directly buy shares of a company, of a private company, which is I think where a lot of the interest is in. Because that’s like the venture capital piece of like, get in on the ground floor, this company goes to the moon, we all make a bunch of money. Like, we’re all happy. Great. And again, the problem with that is that very low trading. So finding ideas is going to be a problem. You’re dependent on fundraising rounds. But the other way that they can do it is through owning shares of funds. So basically becoming a fund of funds. And you don’t have a lot of that happen in mutual funds, but you do see some of the closed-end funds that are out there that are in private equity do do that strategy where they’re an LP—which is a limited partner—in existing private equity or venture capital strategies. And so they’ll have a piece of a bunch of different private equity and venture capital funds, put them all together in their fund. And you as investor get a very diversified, P/E, VC, so buyout, venture capital, different sectors, different vintages—all their little ways to cut and paste all these different strategies together.

And that’s the other way to do it. And so I think a lot of the investor interests, like the retail interests will come on the direct ownership side, like that venture capital side. But I do think the other side of becoming a fund of funds is a viable path and one that I think would benefit people, maybe more so than the venture capital side, just because there is sort of a secondary market for trading those LP interests, too. So you get diversification and you still get a little bit of liquidity on that.

Do Funds With Private Equity or Private Credit Exposure Have Better Performance?

Giles: So how have these funds performed—the private equity exposure versus those counterparts that hold private credit? Is there a difference of returns and then has either group showed promising returns given the risks that they take on?

Shannon: So I’m going to preface this by saying it’s still early days. So there’s a handful of private equity, like venture capital, whatever you want to call it. There’s a few of them out there. Most of them have launched post-2020, which is a bad time for them, because that means generally they raise money and bought in at pretty elevated frothy valuations for the private markets. And so when you look at the cohort of interval funds or closed-end funds that are out there that do the equity side, it’s pretty poor. Most of them have lagged the S&P 500 by a pretty material amount. That said, the IPO markets have been dry and M&A volume is low because of higher interest rates when they’re financing M&A via debt. That’s a problem. And so when you think about how a VC fund generally makes its money, it’s on exits.

And so if your exit routes, which are the IPOs and the M&A, if those are kind of closed off, you’re not going to have an opportunity to sort of realize any big gains. So they haven’t done well yet. I don’t know if they will do well or not, but I will just say it’s early days. On the credit side, those have done reasonably well. Again, most of those are still early days, but those were again, floating rate, a lot of its floating-rate debt. And so when rates rose in the last few years, these funds did better than like a traditional, corporate bond fund that had a lot of fixed-rate debt in it. And so with that, though, it’s still early days. And the thing with like private credit, when you’re lending to small and medium-size businesses, you’re worried about credit risk, you’re worried about default risk. And until you go through a whole credit cycle, you don’t really necessarily know what these returns will look like through the whole cycle. So still early for both of them, but private credit certainly looked a bit better than private equity so far.

Would Holding Private Assets in an ETF Work?

Giles: OK. So Apollo and State Street Advisors have filed to launch a private credit ETF. So different from the options that you’ve talked about earlier. My question is, would holding private assets work in a vehicle that can be traded—bought and sold that frequently?

Shannon: This is going to be a very interesting case study. So, it’s an ETF, which means it’s subjected at 15% illiquidity limit. So they say it’s a private credit ETF. How are they going to try to get around that 15% illiquidity limit? State Street has struck a deal with Apollo where Apollo says they will give intraday bids on all the private credit in the fund, meaning they will be a liquidity provider for the fund. So basically the argument is going to be from State Street that like, hey, we have this person who says they will provide liquidity on these names on a daily basis. Therefore, I can sell it in less than seven days. Therefore, it’s not deemed illiquid. Therefore, we can hold more than 15% in it. There are some issues, though, like Apollo has said it’ll only—well, Apollo hasn’t said this, it’s in the filing—that Apollo will do it up to an undisclosed daily limit. We don’t know what that daily limit is, but that will ultimately determine how liquid or illiquid this sleeve really is. And then there’s also the, it’s an ETF, right? So you’re not transacting directly with the fund company. You’re transacting on the marketplace with market makers and authorized participants.

And so when you think about why is an ETF attractive vehicle? It’s usually tax efficiency. But in this case, it’s like, Apollo is providing the liquidity to State Street, but in terms of how funds get, or how shares of an ETF get created and redeemed, that happens with the market makers. And I don’t think they’ll be the ones either delivering or taking private securities as part of the redemption or creation basket. And so in that case, it’ll be cash in lieu is what they call it. And so in that case, they’ll take the cash, give it to the fund, the fund will then go to Apollo to buy the credit or vice versa. They’ll get the cash from Apollo when they sell or however it may work, whichever direction it goes. But that ultimately means that the fund itself will realize any gains or losses. And so the in-kind benefit of an ETF gets wiped away if you’re having to use that sort of indirect way to get that stuff into the actual fund. So I think there is a potential tax efficiency ding that may happen. But again, we’ll see how this actually plays out. I don’t know if the SEC is going to approve it as is, but it’ll be a fascinating thing to watch.

Opportunities for Investors in Private Asset Funds

Giles: Absolutely. We’ll look out for that. So, and you kind of talked about the risks of getting into these things early days, it seems. But do you see any worthwhile opportunities in some of the vehicles that you’ve talked about?

Shannon: Yeah, I think the interval fund and like the BDC structure is, if you’re going to do privates, I think that is a good way to do it. I think if you’re an investor, you need to ask yourself, why am I investing in this? Like if you need liquidity, don’t invest in it. Invest in public credit or public equity; there are plenty of options out there. But I do think it’s an interesting asset class(es) where you’re trying to capture illiquidity premium. And I think if you’re going to do it, you need it in this structure. It handcuffs investors, it sort of forces them to stay in longer. We all like choice and we all like freedom and all that and it’s great. But if you’re an investor and you want to try to harvest that illiquidity premium, you kind of need to be locked up for a while. So I don’t think I have like a poor view of the interval fund structure, the BDC structure. I think they’re good structures to use it in. The ETF, we’ll see how that goes. But I think that’ll be fascinating because if the SEC does approve it, as is and says that like Apollo is providing liquidity, then that opens the door for a lot of other things to maybe come to market where you can have a single counterpart, you say, I’m the liquidity provider and who knows what can come out on an ETF wrapper from that. But yeah, I don’t think there’s going to be any slowdown in terms of trying to find new ways to get these kind of asset classes in the hands of everyday people.

Private Asset Fund Outlook

Giles: OK. So that last answer kind of touches on my final question, which is what developments do you expect to see in the future?

Shannon: I expect a lot more in private credit. Like I said, I think the equity side, there’s just structural constraints with the startups themselves that I think it’s going to be hard to execute a big strategy on the equity side. Who knows? I mean, there are people certainly attempting to do it. They’re all sort of small funds right now. And so if you look at the list of private equity interval funds or closed-end funds, most of them are under $100 million. So if you want to get this in the hands of the masses, like where you are talking billions and billions of dollars, who knows how it’s going to end up. But again, the credit side, like we talked about a lot more liquid than the equity side. So I think we will see a lot more development on the credit side. Like I said, they have answers for a lot of the how do you get to put the money to work? Where is your stockpile of loans that you can draw from? They’ve got answers for that. So I think we’ll definitely see more on the credit and less on the equity. But this year we’ll probably see a lot in 2025 for sure.

Giles: Well, thanks for coming on the podcast, Jack. I feel like we covered a lot of ground.

Shannon: Thank you for having me. It’s always a pleasure.

Giles: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake Vankersen and associate multimedia editor Jessica Bebel. And thank you for watching Investing Insights. I’m Margaret Giles, content development editor at Morningstar.