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Private market investing is no longer reserved for institutions and ultra-wealthy families. As access improves and investor curiosity grows, financial advisors are increasingly expected to explain the pros and cons of investing outside of public markets. But this is not an area where simple talking points will do. Private markets can be complex, illiquid, and high-risk, so it is crucial that clients not only understand the basics but also have the right mindset going in.
In this article, we will break down the fundamentals of private markets, explain how to assess client suitability, and outline how to have smarter, more transparent conversations about this growing asset class. For financial advisors, building fluency in private markets is no longer optional. It is part of modern portfolio management.
Key Takeaways
- Private markets include investments in private equity, private debt, real estate, and venture capital.
- These investments are often illiquid, complex, and long-term, but can offer higher return potential and portfolio diversification.
- Eligibility is limited by accreditation rules and often requires high investment minimums.
- Advisors should align private market allocation with the client’s broader financial plan and risk profile.
- Clear, honest communication helps clients understand both the risks and opportunities.
- Education is key. Clients are likely hearing about private markets in the news or from peers and may come to the table with misconceptions or overconfidence.
What Are Private Markets?
Private markets refer to investments in assets that are not traded on public exchanges. They include:
- Private equity: Ownership stakes in private companies, often via funds that acquire, restructure, or grow businesses before exiting. These investments are typically made through buyout funds or growth equity funds.
- Venture capital: Equity investments in early-stage startups with high growth potential and high failure risk. These are often associated with technology, biotech, or other emerging sectors.
- Private credit: Loans made by non-bank entities to companies, often with higher yields than public debt. This market has grown rapidly as banks have pulled back from middle-market lending.
- Private real estate: Direct investments or pooled vehicles in commercial or residential property not listed on exchanges. These can include everything from apartment complexes to office parks to industrial warehouses.
These differ from public market investments in that they lack daily liquidity and standardized disclosure. Valuations are less frequent and more subjective. Entry points, fees, and structures also vary widely, requiring more advisor oversight and due diligence. Investors are often committing capital before knowing what specific assets will be acquired or when returns will be distributed.
Note
Many private market investments often come with lock-up periods of 7 to 10 years or longer.
Private Market Fundamentals
Who Can Invest in Private Markets?
While interest in private markets is growing, not everyone can participate. Advisors need to be upfront about eligibility and access.
- Accredited investor rules require individuals to have at least $200,000 in annual income (or $300,000 jointly) or a net worth of over $1 million, excluding primary residence.
- Some funds are open only to qualified purchasers, a higher threshold based on $5 million or more in investable assets.
- Minimum investments often start at $250,000 or more, although some platforms are bringing that down to $25,000 or lower. Advisors should know which options are available for mass affluent clients versus ultra-high-net-worth clients.
- Access points include feeder funds, interval funds, and online platforms that aggregate private offerings. Registered investment advisors may also have partnerships with platforms offering vetted access to private funds.
Tip
Be prepared to explain why these rules exist. They are meant to protect less experienced investors from the complexity and risk of private deals.
Risks and Rewards of Private Investing
Risks
- Illiquidity: Investors may not be able to access their money for years. There are often no secondary markets or redemption options.
- Valuation uncertainty: No daily pricing; performance is reported quarterly or less frequently, and valuations may be based on internal models.
- Complex structures: Fund terms, capital calls, and distributions can confuse unprepared investors. Advisors should provide a clear explanation of how capital is drawn and returned.
- High fees: Private equity often involves a “2 and 20” fee model—2% management fee plus 20% of profits. Additional fees may include fund-of-funds layers, legal fees, and administrative costs.
- Blind pools: Investors may commit capital before knowing what assets will be acquired. This adds uncertainty and requires greater trust in the fund manager.
How Individuals Can Access Private Markets
Rewards
- Potential for higher returns: Particularly in early-stage ventures or successful buyouts. Historically, top-quartile private equity funds have outperformed public markets.
Diversification: Returns are less correlated to public markets. This can help reduce overall portfolio volatility. - Access to innovation: Private markets offer exposure to disruptive technologies and emerging industries before they go public or are widely available.
Important
Past performance of private investments is not a guarantee of future results. Many funds underperform or fail. Managers and strategy selection matter greatly.
How To Prepare Clients for Private Market Conversations
When introducing private markets, start by setting the tone: this is not about chasing returns. It is about evaluating whether the client’s financial situation and emotional tolerance are compatible with long-term, illiquid investments.
- Reinforce the time commitment: Make sure clients understand they may not see a return—or even a statement showing progress—for several years. They must be willing and able to wait.
- Run the stress test: Could the client’s plan succeed even if this investment fails? If the answer is no, the allocation should likely be reconsidered.
- Explain capital calls: Clients need to know they may be asked to contribute more funds over time, depending on the fund’s structure and investment pace.
- Use plain language: Avoid jargon like IRR and carried interest unless the client is sophisticated. Break down fee structures and distribution waterfalls into simple terms.
- Revisit goals and cash flow: Reconfirm liquidity needs and align the investment with the client’s time horizon for other financial goals.
Risks, Returns, and Smart Strategies
Questions Advisors Should Ask (and Be Ready to Answer)
- What is your time horizon?
- Are you comfortable with the idea of locking up your money for 7 to 10 years?
- Do you understand that the valuation process is not transparent or frequent?
- How does this investment fit into your overall portfolio?
- What are the fees, and when are they charged?
- How much experience does the fund manager have in this strategy?
- What happens if you need access to your funds early?
Warning
Clients may have unrealistic expectations about performance. Remind them that while some funds outperform, others can lose money. Selection and timing are critical, and luck can be a factor.
What Are Private Market Investments?
Private market investments are assets not traded on public exchanges. They include private equity, private credit, venture capital, and private real estate. These investments are typically only available to accredited or qualified investors.
Who Qualifies as an Accredited Investor?
An accredited investor must have earned $200,000 in income ($300,000 jointly) in each of the last two years, or have a net worth over $1 million excluding their primary residence. The rules are in place to ensure investors can withstand the potential risks and losses associated with these types of investments.
Are Private Investments Riskier Than Public Ones?
Yes. They involve less transparency, longer time horizons, and often higher fees. They can offer higher returns but come with more uncertainty. Market risk, manager risk, and liquidity risk are all heightened in the private space.
How Do Clients Access Private Equity or VC Funds?
Through fund managers, feeder funds, registered investment platforms, or advisors with access to private offerings. Some lower-minimum platforms are making access more widespread, but due diligence is still essential.
What Should Advisors Disclose About Fees and Liquidity?
Clients should understand all fee layers, including management fees and performance fees. Advisors must also explain liquidity limitations and redemption policies. Transparency here builds trust and helps avoid surprises down the road.
The Bottom Line
Private market investing offers opportunity, but it is not for everyone. Advisors must go beyond product knowledge and have real conversations about risk, timeline, and purpose. When done well, private investments can complement a broader financial strategy. When misunderstood, they can lead to frustration and regret. Equip your clients with the full picture so they can make decisions with confidence and clarity.
Private markets will likely play an increasingly important role in diversified portfolios. But with greater opportunity comes greater responsibility. Advisors who can educate, prepare, and guide clients through this landscape will be well-positioned to deliver long-term value.
