Morningstar Podcast | Risks, Benefits, and Options for Individual Investors in Private Assets

Key Themes

The accessibility of private assets is increasing, with fund companies introducing more options for retail investors.
Private equity and credit offer distinct opportunities but also come with liquidity and valuation risks.
Structural and operational differences between private equity and credit will shape their adoption in retail-focused vehicles.

By the Numbers

Illiquidity Limits: Mutual funds can invest up to 15% of assets in illiquid securities; interval funds can hold up to 100%.
NAV Discrepancy: Example of exchange-traded closed-end fund with NAV of $5–$6 trading at $60 (10x valuation).
Private Equity Funds: Most launched post-2020, with underperformance relative to the S&P 500 due to overvaluation and limited exits.
Private Credit Funds: Performed better, benefitting from floating-rate debt in a rising rate environment.

Sector Highlights

Private Credit: More adaptable to retail products due to liquidity mechanisms like warehousing agreements with originators.
Private Equity: Limited by structural challenges, including resistance to secondary trading by startups.

Opportunities for PE Investors

Interval funds and BDCs provide a balanced structure for capturing illiquidity premiums.
Direct investments in venture capital and private equity funds remain attractive but come with liquidity trade-offs.
The potential rise of private credit ETFs (e.g., Apollo/State Street) may expand accessibility, pending regulatory approval.

Risks to Monitor

Liquidity: Limited redemption options in interval funds and potential pricing inefficiencies.
Valuation Risks: Dependence on fund managers’ NAV estimates creates uncertainty.
Credit Cycles: Private credit’s performance depends on navigating full credit cycles without excessive defaults.

Expert Insights

Jack Shannon: “Private credit has looked more promising than private equity so far, but both asset classes are still in early stages.”
Structural Challenges: Startup restrictions on share trading make private equity less adaptable to interval funds.

Link to Morningstart podcast episode

Investment Vehicles mentioned in this article

Investment Vehicle

Description

Advantages

Risks/Challenges

Mutual Funds

Open-ended funds with up to 15% allocation to illiquid private assets.

Low exposure to illiquid assets; accessible for retail investors.

Limited allocation; valuation and liquidity concerns for private holdings.

Exchange-Traded Closed-End Funds (CEFs)

Funds investing in private assets but traded on public exchanges.

Traded on exchanges, allowing easier access and transparency.

Market price may significantly diverge from net asset value (NAV).

Interval Funds

Closed-end funds that limit redemptions (e.g., 5%-25% per quarter) but allow higher allocations to private assets.

Higher allocation to private assets; suitable for long-term investors.

Limited liquidity; potential delays in accessing invested capital during redemptions.

Business Development Companies (BDCs)

Funds focused on lending to small and mid-sized businesses, often similar to private credit funds.

High allocation to private credit; access to illiquidity premium.

Structural and regulatory restrictions; higher risk due to credit exposure.

Private Credit ETFs

ETFs that invest in private credit, with agreements to ensure intraday liquidity (e.g., Apollo/State Street).

Liquidity provided through agreements; easier to trade than interval funds.

Uncertain regulatory approval; potential tax inefficiencies in fund transactions.

Private Equity Fund-of-Funds

Funds that invest in multiple private equity or venture capital funds, providing diversified exposure.

Diversification across funds, sectors, and vintages; secondary market liquidity for LP interests.

Limited transparency; indirect exposure may dilute potential returns compared to direct private equity investments.