10 questions you need to ask before investing in private markets

The push to steer retail investors into private markets is gathering pace. Private credit, private equity, unlisted infrastructure and direct property are all being packaged as ways to access higher returns, lower volatility and better diversification than listed markets.

The pitch is compelling. The reality is more nuanced.

Private markets are not inherently bad. Far from it. Institutional investors, super funds, sovereign wealth funds and endowments have used them effectively for decades, and we use a number of private market exposures across portfolios. But the version increasingly being sold to retail investors comes with risks that are often underplayed in the marketing material.

Before committing meaningful capital to assets that are hard to price, hard to sell and hard to compare, investors should understand the trade-offs.

How big has this become?

Australia’s private capital market has grown rapidly. Australian-focused private market assets under management have increased by more than 140% over the past decade to around $167 billion, while the private credit market alone has expanded from about $35 billion in 2015 to more than $200 billion by the end of 2024.

The regulator has noticed. ASIC has established a dedicated private markets unit and, in 2025, identified several key risks for investors, including opacity, conflicts of interest, valuation uncertainty, illiquidity and leverage.

In other words, this is no longer a niche corner of the market. It is becoming mainstream, and that makes investor education more important.

Risk #1: The valuation problem — smooth returns are not the same as low-risk returns

Perhaps the most misunderstood feature of private market investing is how assets are valued.

Unlike listed shares, where prices update continuously, private assets are typically valued periodically, often quarterly, and frequently using models rather than observable market transactions. This can create what researchers call “return smoothing”.

That sounds harmless, but it matters.

Research has found that once this smoothing effect is adjusted for, the true volatility of some private assets can be materially higher than reported. For large private equity buyout funds, estimated true volatility has been found to be almost double the reported figure. For early-stage venture capital, the gap can be even more pronounced.

In simple terms, the steady return profile shown on a factsheet may partly reflect how the numbers are calculated, rather than how stable the underlying assets really are.

That has important implications for portfolio construction. If the apparent diversification benefit is partly a function of stale or modelled pricing, investors may be paying higher fees for the comfort of smoother-looking statements, rather than genuinely lower risk.

The Smoothing Effect: Reported vs. estimated true volatility

Risk #2: Liquidity — you may be able to redeem, but not when you need to

Liquidity is another area where investors need to be clear-eyed.

In listed markets, investors can usually sell quickly, even if the price is unattractive. In private markets, that flexibility may not exist. Private equity funds commonly involve lock-up periods of five to ten years. Even so-called “semi-liquid” funds can impose redemption limits, delays or gates when too many investors want to exit at the same time.

Australia has seen this before. During the GFC, a number of retail-facing credit, mortgage and property funds froze redemptions or failed altogether. Investors often discovered too late that “income-focused” and “secured” did not mean liquid or low-risk.

The key question is not simply: “Can I redeem?”

It is: “Can I redeem when I need to, and under what conditions?”

Those are very different things.

Risk #3: Fees — the complexity premium

Listed funds and ETFs have driven fees down dramatically over the past decade. Private markets have not followed the same path.

Management fees of 1.5% to 2% per annum are common in retail private market funds, and performance fees can add another meaningful layer. Structures resembling the traditional “2 and 20” model — a 2% management fee plus 20% of profits above a hurdle — are increasingly appearing in products aimed at broader investor markets.

Fees matter enormously over time.

On a $500,000 investment held for ten years, the difference between paying 0.20% and 2.00% per annum can amount to roughly $100,000 in lost compounding, assuming an 8% gross return, before even considering performance fees.

That does not mean high-fee products should always be avoided. But the promised return premium must be substantial, consistent and genuinely net of all costs to justify the drag.

Risk #4: Opacity — you may not know exactly what you own

Private markets do not carry the same disclosure obligations as public markets.

Investors may receive quarterly or semi-annual updates that describe portfolio performance in broad terms, but without the level of detail available from listed companies or listed funds. In private credit, for example, investors may not know the names of the underlying borrowers, the true quality of the security, the loan-to-value ratios, the level of concentration, or the amount of leverage used at the fund level.

Even commonly used terms can be misleading.

“Secured” can mean very different things depending on the structure. It may refer to direct asset security, security through a special purpose vehicle, or security over shares in a holding company. These can lead to very different outcomes if something goes wrong.

That matters most in stress. When a loan defaults or an asset needs to be restructured, investors need to understand where they sit in the capital stack. That is hard to do when the underlying exposures are not clearly disclosed.

Risk #5: The regulatory gap

Another point often left out of sales conversations is that not all private market access is regulated in the same way.

Retail investors accessing private market products directly do not necessarily receive the same level of prudential oversight, governance and risk management that applies within APRA-regulated superannuation funds.

ASIC has already raised concerns that parts of the private credit sector remain relatively immature and largely untested through a full credit cycle. Issues around governance, transparency, fees, valuations and conflicts management are all areas of focus.

Regulatory uplift is likely, but investors should not assume the protections are already in place.

So, should investors avoid private markets?

No. That would be too simplistic.

Private markets can play a valuable role in a well-constructed portfolio. Private equity can provide access to companies and strategies not available on listed markets. Infrastructure and property can offer long-duration, inflation-linked cash flows. Private credit can provide a legitimate source of income and diversification, and we own private credit exposures within our income strategy, both listed and unlisted.

But retail investors need to understand that the retail version of private markets can differ meaningfully from the institutional version.

Retail products may involve higher fees, weaker negotiating power, less transparency, smaller due diligence resources and, in some cases, more concentrated or riskier underlying exposures. This does not make them inappropriate, but it does raise the bar for due diligence.

For advisers, that due diligence should not stop once the product is added to a portfolio. It should be ongoing. That means staying close to the manager, monitoring changes in portfolio construction, assessing defaults and arrears, understanding valuation methodology, and watching for any drift in risk.

In private credit specifically, defaults, restructures and workouts should be expected over time. The key is not whether problems occur, but how well the manager handles them.

Questions to ask before investing

Before allocating to a private market product, investors should ask:

1. What is the total fee, including management fees, performance fees and underlying costs?
2. What are the redemption terms, and what happens if many investors want to exit at once?
3. How are the assets valued, and who performs the valuation?
4. What is the exposure to property, and how diversified is it?
5. Is leverage used at the fund level, not just at the asset level?
6. What is the track record through difficult market conditions?
7. How does the product compare, after all fees, with a diversified listed alternative?
8. What information will I receive on the underlying holdings?
9. What happens if an underlying borrower or asset gets into trouble?
10. Why is this product suitable for my portfolio, rather than simply attractive in isolation?

Private markets can earn a place in portfolios. But “my adviser recommended it” and “it looks less volatile” are not sufficient reasons to lock up capital for years in something investors may not fully understand.

The opportunity can be real, but so can the risks. Ask the hard questions before investing, because once capital is committed, it may be much harder to change your mind.

James Gerrish is the Founding Partner & Portfolio Manager at Market Partners, a boutique Investment Management firm located in Sydney. He is also the primary Author & Portfolio Manager at Market Matters, a digital investment platform empowering investors to make more informed investment decisions.