The Risks the Private Markets Pose to Retail Investors, the Economy, and Financial Stability
By Benjamin Schiffrin, Director of Securities Policy
BlackRock loses $600 million. That is a headline not typically associated with one of the largest, and most profitable, asset managers in the world. But that is exactly what happened after one of Blackrock’s private equity funds bought a controlling stake in Alacrity Solutions, an insurance claims manager, in February 2023. Alacrity’s business suffered after BlackRock invested, and it ultimately hired advisers to lead it through a restructuring with its creditors. Less than two years after BlackRock’s purchase, that deal wiped out BlackRock’s $600 million equity investment in Alacrity in its entirety.
This loss shows the perils that even the most sophisticated investors face in the private markets. The private markets lack the disclosure requirements that exist in the public markets, and are also far more illiquid, which makes the assets in a private fund’s portfolio hard to value. This is what caused BlackRock’s loss in the Alacrity deal. Alacrity struggled with its debt, but until a few months before the restructuring its debt looked like a solid bet. That’s because the problems would have been hard to glean based on public disclosures. Since private lenders need only report valuations to investors quarterly, big gaps can exist between how an asset is valued and the actual performance of a company. It’s unsurprising, therefore, that the lack of clarity on what an asset is worth is a regular complaint in private markets and an issue that concerns regulators. But the broader point is that if sophisticated institutional investors can suffer losses because private market assets are hard to value, what chance do retail investors have in the private markets?
This question is especially pertinent today as Congress and the Securities and Exchange Commission seek ways to loosen the rules that prevent private funds from reaching retail investors. On March 25, 2025, the House Financial Services Committee will hold a hearing entitled “Beyond Silicon Valley: Expanding Access to Capital Across America.” If other recent hearings on “expanding access to capital” are any indication, the hearing will focus on ways to liberalize the rules governing private markets. The hearing follows guidance that the SEC issued two weeks ago to allow private funds to more easily advertise to the general public. Although previously private funds had to take “reasonable steps” to verify that purchasers were accredited investors—investors able to fend for themselves in the private markets—the guidance allows private funds to sell to investors so long as the investors agree to certain minimum investment amounts and self-certify that they are accredited.
The House hearing and SEC guidance are part of an intensifying push to strip away the traditional protections for smaller investors, but that effort is likely to be to those investors’ detriment. That’s because the lack of disclosures, illiquidity, and valuation difficulties that plague the private markets would be almost impossible to navigate for retail investors.
The fact of the matter is that retail investors are not on equal footing with institutional investors and high-net-worth individuals who have traditionally invested in the private markets. Those investors have the financial means to absorb losses when they occur, and they know at the outset that in the private markets there are going to be many more investments that fail than succeed, because the odds of a startup folding are much higher than of an established public company collapsing quickly. Unlike these investors, however, the typical retail investor can’t invest in ten private offerings and hope one pans out.
The potential harm to retail investors would be especially pronounced, as evidence increasingly shows the risks associated with private markets. Private equity portfolio companies are about 10 times as likely to go bankrupt as non-private equity owned companies. Bankruptcy filings by U.S. companies backed by private equity and venture capital increased by more than 15% in 2024 to the highest annual total on record.
These statistics show that BlackRock’s $600 million loss is not an isolated incident. For example, in 2024, Vista Equity Partners, a private equity firm, lost its $4 billion investment in Pluralsight, a software company. Vista bought Pluralsight in 2021 at a time when tech valuations were high. Private credit firms extended loans to Pluralsight as part of Vista’s buyout. But the valuation of Pluralsight’s debt varied widely. And because the loans were not publicly traded, the extent to which they were under stress did not materialize until it became clear Vista might lose the business. The episode served to highlight that in the private markets it is possible for some valuations to be untethered from reality.
Indeed, the difficulty of valuing private credit loans could expose investors in private funds to unforeseen losses. Investors could be left in the dark or misled if a lender or buyout firm has been overly optimistic about its portfolio. One could imagine that the difficulties faced by traditional investors in the private markets would be exponentially greater for retail investors. This is especially likely given the creation of private credit exchange traded funds (ETFs) that are marketed to retail investors. Retail investors normally consider ETFs to be low-risk investments and are unlikely to understand the risks of a private credit ETF.
There is another problem with expanding access to the private markets. Proponents say that expanding retail investor access to the private markets would boost capital formation. But the fact that private market assets may be misvalued means that capital is not allocated efficiently in the private markets. Indeed, a recent study shows that a dollar of capital allocated in public markets generates $0.35 more in annual revenue over the next three years than a dollar allocated to a comparable firm via a private market deal. Artificially inflated valuations in the private markets may be beneficial for asset managers collecting fees, but misallocating capital in this manner harms the real economy.
Moreover, the harm to the real economy may not be limited to inefficient capital allocation. The opacity that permeates the private markets means that assessing the quality of the underlying assets is extraordinarily difficult, and a spate of defaults could ensue if the underlying assets are actually of poorer quality than their valuations suggest. This could have spillover effects throughout the financial system given that private equity and private credit have never played a bigger role in the financial markets than they do today, including through significant interconnections with the taxpayer-supported banking system.
For these reasons, financial regulators around the globe are voicing concerns about the lack of transparency in the private markets. These concerns have led the European Central Bank to seek more information about private credit exposures, the UK’s Financial Conduct Authority to launch a review of private asset valuations, and the Bank of England to warn that the opaqueness of private asset valuations could jeopardize financial stability. The Financial Stability Oversight Council has also identified private credit as a financial stability risk. Instead of reducing protections for retail investors, Congress and the SEC should heed the well-recognized concerns about the private markets and take steps to better protect all investors, the economy, and the financial system from the risks the private markets pose.