Private equity — the practice of investing in companies that are not publicly traded — was once the exclusive province of large institutional investors: pension funds, endowments, sovereign wealth funds, and ultra-high-net-worth individuals. Over the past decade, the democratization of private equity through new fund structures, regulatory changes, and the active marketing efforts of major private equity firms has brought this asset class into the reach of a broader investor population. But with accessibility comes complexity, and the evidence on private equity’s actual performance and risk profile for non-institutional investors deserves careful examination.
The Private Equity Universe
Private equity encompasses several distinct strategies that are often conflated. Leveraged buyouts (LBOs) involve acquiring established companies — often taking them private from public markets — using a combination of equity and significant debt, improving operations or financial structure, and selling at a profit after a holding period of typically 4-7 years. Venture capital invests in early-stage companies in exchange for equity stakes, accepting high failure rates in exchange for the possibility of massive returns from the rare breakout success. Growth equity occupies the middle ground, providing capital to established private companies seeking to accelerate growth without the leverage of a buyout.
The asset class’s total committed capital has grown dramatically: Preqin estimated that global private equity assets under management reached approximately $9.3 trillion as of early 2026 — more than double the $4.1 trillion reported in 2018. This growth reflects both performance track records that attracted institutional capital and the deliberate expansion of distribution to new investor segments.
The Performance Case: Impressive but Complicated
The historical performance case for private equity is compelling on its face. Cambridge Associates’ analysis of global private equity over the 25-year period through 2024 showed an annualized return of approximately 14.5%, compared to the S&P 500’s 10.6% over the same period. That approximately 4 percentage point annual outperformance compounds to an enormous wealth difference over a quarter century.
But this headline comparison requires several important caveats. First, private equity returns are significantly more illiquid than public equities — capital is locked up for 5-10 years, and investors cannot exit when markets are at a peak or when they need liquidity. This illiquidity premium is economically real and justifies some return premium, but it is a risk that the raw return comparison doesn’t fully capture.
Second, private equity valuations are largely self-reported and updated infrequently, which creates the appearance of lower volatility than public markets. When PE firms report quarterly NAVs, they are typically based on appraisals and comparable company analysis rather than real-time market transactions. This “smoothing” of returns makes PE look less risky than it actually is, complicating proper risk-adjusted comparisons.
Third, the performance data suffers from survivorship bias: failed private equity funds are underrepresented in historical databases because they don’t report data after they wind down. The average private equity performance looks better than the median investor experience because the worst outcomes are undercounted.
The Leverage Factor
Private equity’s outperformance during the low interest rate era of 2010-2021 was substantially driven by financial leverage. LBO transactions typically finance 55-65% of the purchase price with debt, with the equity investors owning the remaining 35-45%. When the acquired business earns even modest returns on assets, the equity return is amplified dramatically through the leverage — but that same leverage amplifies losses when businesses underperform.
The interest rate environment of 2022-2026 has created genuine stress for the private equity industry. LBO debt that was issued at 4-5% interest rates when rates were low is being refinanced at 7-9% when loans mature, dramatically increasing interest expense and reducing the free cash flow available to the equity owners. The Wall Street Journal reported in early 2026 that approximately 15% of large buyout portfolio companies are experiencing some form of debt covenant distress — a figure that reflects the leverage hangover from years of cheap money.
The Denominator Effect and Reduced Distributions
Institutional investors in private equity have faced a specific challenge since 2022 known as the “denominator effect.” As public equity markets declined in 2022, the public portion of institutional portfolios fell in value, making the private equity allocation — which didn’t mark down proportionally — appear to exceed target allocations as a percentage of total assets. This caused many institutions to reduce or halt new PE commitments, reducing the capital flowing into new PE funds.
Simultaneously, PE exits have slowed dramatically. The IPO market contraction and the decline in M&A activity have reduced the opportunities for PE firms to sell portfolio companies and return capital to investors. Preqin data shows that PE distributions to limited partners in 2024 were the lowest in a decade, creating a liquidity squeeze for investors who had built financial plans around expected PE distributions. The “vintage years” of 2018-2021, when deals were done at peak valuations with peak leverage, are likely to produce the most disappointing outcomes of any PE vintage cohort in the past 15 years.
The Democratization Question
Major private equity firms — Blackstone, KKR, Apollo, Carlyle — have invested heavily in creating vehicles accessible to individual investors with lower minimum investments than traditional institutional LP stakes. Blackstone’s BREIT and other non-traded REITs and BDCs have attracted hundreds of billions from individual investors seeking the yield premiums that PE-managed real assets offer.
The experience of these vehicles during 2022-2024 highlighted risks that individual investors may not have fully appreciated. BREIT implemented redemption restrictions in late 2022 when investor redemption requests exceeded the fund’s quarterly limit — a liquidity restriction that many investors encountered without having fully understood at the time of investment. While the fund’s NAV held up better than many listed REITs during the rate shock, the redemption experience was a reminder that illiquidity in alternative fund structures is real and can be experienced at precisely the moments when investors most want liquidity.
What Individual Investors Should Consider
Private equity as a category is not uniformly good or bad — it encompasses a vast range of strategies, managers, and risk profiles. For investors who have access to it through institutional-quality managers with genuine alignment of interests (typically through private wealth platforms with minimum investments of $250,000 or more), a modest allocation — 5-10% of a total portfolio — may provide genuine diversification benefits and a return premium over public equities, particularly for investors with long time horizons and limited liquidity needs.
For investors who are being offered PE exposure through structures designed specifically for retail distribution, the due diligence bar should be high: fee structures, liquidity provisions, investment mandate, manager track record, and alignment of interests should all be examined carefully. The PE industry’s expansion into retail distribution has created both genuine opportunities and products where fees and complexity obscure limited actual value.
The fundamental question for any investor considering private equity is straightforward: am I being compensated for the illiquidity, complexity, and fee levels that this investment requires? When the answer is clearly yes — typically in top-quartile funds with institutional fee structures and genuine access — private equity can be a valuable portfolio addition. When the answer is uncertain, the simplicity, liquidity, and lower costs of public equity investments represent a formidable competing alternative.
Sources: Cambridge Associates Private Equity Benchmark, Preqin Global Private Equity Report 2026, Wall Street Journal PE debt distress reporting, Blackstone BREIT investor reports, SEC alternative investment fund disclosure data
