Stephen Joel Trachtenberg, the former president of my alma mater George Washington University, was fond of comparing college to vodka.
Trachtenberg was famous for dramatically hiking GW’s tuition — The Atlantic dubbed him “The High Priest of Runaway College Inflation” back in 2012 — and he wasn’t shy about explaining why. With college, as with vodka, the consumer chooses between essentially identical products, he told The Atlantic. The reason the shopper thinks the likes of Grey Goose is better than a bottom shelf brand, despite the fact that they’re both essentially flavorless, is simple, he said: It costs more.
The market’s current state makes me wonder if investors are shopping in the vodka aisle, too. Some investments meant for wealthy investors have been lagging major public indexes, of late.
Consider private equity funds, which invest in non-publicly traded businesses. Generally, you have to be an accredited investor to buy in, meaning you have to have a net worth north of $1 million, excluding your primary residence, or individual annual income over $200,000. These funds are exclusive, expensive and, lately, losing to much cheaper options.
Over the three years that ended in March, New York City-based investment firm Cambridge Associates’ Private Equity Index, which includes about 1,800 funds, returned an annualized 7.4%, net of fees, according to a report released in August. Over five years, the index returned 9.3%. Meanwhile, a fund tracking the S&P 500, which anyone can buy and costs fractions of a percent in fees to own, returned 18.3% and 12% over three and five years, respectively.
So are private investments akin to overpriced liquor? Not exactly, experts say. But it’s important to understand the advantages and risks of owning them if you’re interested in incorporating them into your portfolio someday.
The advantages of owning private investments
Proponents of private investments generally tout two advantages they have over public markets. First, they have potential for higher long-term returns. The same Cambridge Associates private equity index that has lagged the S&P over the past three and five years returned an annualized 12.8% for the 25 years ending in 2025 compared with a 10% return in the S&P 500, the investment firm found.
Second, private funds can do some things public funds can’t, such as using debt to acquire companies or getting in on the ground floor of investment opportunities before they go public. Investing experts say earlier-stage companies can offer higher investment upside and come with greater risk than more established firms.
“Private markets benefit from leverage to borrowing, illiquidity and having access to earlier stage investment opportunities,” says Jon Baranko, chief investment officer at Charlotte, North Carolina-based investment firm Allspring. “By the time they come to market, most [companies] are pretty mature.”
Plus, for an investor who wants a broadly diversified portfolio, private markets provide another sleeve of assets that move based on different factors than traditional public investments such as stocks, bonds and mutual funds.
“I always believed that your portfolio was not optimized unless you ultimately had a truly diversified portfolio across both public and private [markets] and within public and private,” says Mitchell Caplan, CEO of New York-based private investment firm Willow Wealth.
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. In March, the Labor Department proposed a rule that has yet to be finalized which would allow workplace plans to more easily include private market assets.
The moves were seen by some in the investment industry as a major win for retail investors. BlackRock CEO Larry Fink, for instance, argued in his 2025 shareholder letter that “democratizing” private markets would allow everyday investors to get in on the same return potential that the only the wealthy currently enjoy.
But the price thresholds for owning these funds is due in part to the idea that these are complicated holdings meant for sophisticated investors. That’s why market pros say you should examine the risks of owning a private investment — as well as the potential drivers for returns — before investing. Notably, private investments come in many different flavors, and you’d be wise to consult with a financial professional before making any changes to your portfolio.
Know the risks in private markets
While no two private investments are exactly alike, they tend to come with two prominent risk factors to consider.
Illiquidity
If you own a stock or bond mutual fund, selling your share — if you want — pretty straightforward. When you sell your portion of the portfolio, the fund ostensibly sells the investments that you owned and gives you the cash.
The same is not true of many private equity funds, which often come with set holding periods and limits on how much investors can redeem. The holding period for a fund might not match your timeline for when you might need the money, says Baranko.
“There have been challenges around vehicles that have been sold to retail investors who maybe have shorter timelines on their investment horizons than some of these investments require,” he says.
Cost
Beyond generally having to be an accredited investor to get your foot in the door, private investments also tend to come with higher fees than you’ll pay to invest in a mutual fund or exchange-traded fund.
Under a traditional model, a private equity fund may charge a 2% annual fee, plus 20% of the fund’s profits over a certain threshold. “A lot of that is compressing,” says Caplan, adding that you’re likelier to see a 15% fee on fund outperformance than 20% these days.
Still, for comparison, the annual expense ratio on an index ETF was 0.14% as of year-end 2025, according to Morningstar.
And right now, interest rates are creating challenges for private equity. From October 2012 through September 2022 — a period of consistently low short-term interest rates — private investments trounced their public counterparts, according to data from Allspring. But from October 2022 through March 2026, amid rising rates, Bloomberg’s private equity index lagged the S&P 500 by 18 percentage points.
“You had a period where private markets in general were able to take advantage of low hurdle rates because they had cheap money, and then you know they could translate that into pretty good opportunity going forward,” says Baranko. “But when rates went up in 2022, you’ve seen that reverse.”
Private investments won’t necessarily sink across the board if interest rates remain high. The trend just underscores the need to understand the risks and rewards of any particular private investment before you buy, experts say.
“It’s really important to educate the consumer about what that investment does, what the pros are, what the risks are inherent in it,” says Caplan. “And do it in plain English, so that consumers who are less sophisticated really truly understand what they’re investing in and why it makes sense in the creation of their overall portfolio.”
