Private Markets Explained: What Investors Must Evaluate Before Investing
KEY POINTS:
Private market investments offer a broader opportunity set and the potential for higher returns in the long term—but come with less liquidity and transparency.
Manager selection matters more in private markets due to wide performance dispersion.
Fund structure, fees, and liquidity terms can significantly impact investor outcomes.
Thoughtful due diligence—not just performance review—is essential before investing.
Private market investments are no longer limited to large institutions. Today, more high-net-worth investors are gaining access to private equity, private credit, real estate and infrastructure opportunities.
That access can expand what is possible in a portfolio—but it also introduces new complexities and risks.
Before investing, it is important to understand what makes private markets different—and what to evaluate beyond performance.
Why Private Markets Are Gaining Attention
Private markets open the door to investments that are not available on public exchanges—such as privately owned companies, private loans, and private real estate and infrastructure assets.
For many investors, the appeal comes down to three things:
A broader opportunity set beyond traditional stocks and bonds
The potential for enhanced returns over time
Lower volatility and correlation relative to public markets
However, those potential benefits come with tradeoffs. Relative to publicly-traded investments, private markets are typically less liquid, less transparent, more complex, and carry higher fees and expenses.
Understanding those differences is the first step toward making informed decisions.
What Are Private Market Investments?
Fundamentally speaking, private market investments are assets that are not traded on public exchanges or through dealers. Instead of buying stocks or bonds, investors allocate capital directly into assets such as businesses, loans, or properties.
The Four Main Types
Private Equity
Investments in privately held companies, often focused on growth or operational improvements. Returns are primarily driven by long-term value creation.
Private Credit
Loans issued directly to companies. Returns typically come predominantly from interest income tied to a benchmark rate (e.g., SOFR) plus a credit spread.
Private Real Estate
Investments in income-producing properties or development projects. Returns come from rental income and potential appreciation.
Private Infrastructure
Investments in essential assets like energy, transportation, or utilities infrastructure. These often generate steady, contract-based income and some capital appreciation.
What Investors Should Evaluate Before Investing
Access may be easier today, but due diligence remains critical.
Here are five key areas to focus on:
1. Manager Quality
In public markets, investors can broadly diversify through index funds and performance differences across managers are sometimes less pronounced. In private markets, outcomes depend heavily on the manager. Performance differences between managers can be significant.
When evaluating a manager, consider:
Track record consistency across market cycles
Investment discipline and process
Alignment of interests (e.g., how they invest alongside clients)
Depth of team and deal-sourcing capabilities
Strong managers often have better access to opportunities—and more experience navigating changing market conditions.
2. Fund Structure
How investors access private markets can shape their overall experience.
Common structures include:
Drawdown funds: Limited partnerships with very little to no liquidity and a limited lifespan. This structure carries additional complexities, such as managing capital calls and dealing with complex paperwork and K-1 tax forms. It is also typically not available to most individuals, even high-net worth investors.
Evergreen or semi-liquid funds: These funds operate in perpetuity and offer the potential for limited liquidity on an ongoing basis. There are no capital calls; an investor’s money is fully invested from the beginning. They are generally available to most investors and offer greater transparency and operational ease.
Each structure has tradeoffs. For example, traditional drawdown funds offer more flexibility for managers but can experience significant cash drag as cash sits uninvested while waiting to be called. Evergreen structures may offer more convenience—but still come with liquidity limits.
Understanding how and when you can access your capital is essential.
3. Liquidity
The lack of liquidity is one of the defining characteristics of private markets. Unlike publicly traded investments, private assets cannot always be sold quickly at a fair price. This illiquidity is supposed to provide a long-term return premium over public markets, but it can also have a significant impact on investors.
Key questions to ask include:
How often can investors redeem capital?
What happens during periods of high redemption requests?
Does the fund maintain sufficient liquidity reserves?
Even in semi-liquid funds, access to capital may be limited or delayed—especially during periods of market stress. Semi-liquid funds typically only offer liquidity on a monthly or quarterly basis, and if redemption requests exceed a certain threshold (typically 5% of the fund’s assets), the fund may pro-rate or even completely stop redemptions to protect the remaining investors. Investors need to be comfortable with not being able to access their money at a moment’s notice and should treat all private market investments as long-term commitments.
4. Fees & Expenses
Private market investments typically come with higher costs than publicly-traded investments.
These may include:
Management fees
Performance-based fees
Fund operating expenses
Underlying fund fees (in fund-of-funds structures)
Total annual costs for investors are typically in the 2% to 3% range, far exceeding the usual fees charged by index funds and even actively managed public market funds.
The higher costs are mainly the result of the increased complexity of investing in private markets as well as the resource-intensive nature of sourcing differentiated opportunities and actively managing illiquid portfolios. Investors should ensure that costs are reasonable relative to similar funds, and that the manager is delivering sufficient value to justify them.
5. Strategy & Return Expectations
Finally, it is important for investors to understand a fund’s strategy and form reasonable expectations around it. Returns may come from income, capital appreciation, or both.
Understanding how a strategy generates returns helps set realistic expectations.
It is also important to evaluate:
Asset class and risk profile (equity vs. debt allocations; core, core-plus, value-add, and opportunistic strategies)
Exposure to public vs. private markets
Expected returns vs. historical returns
Having a clear understanding of the strategy is essential to ensure the investment aligns with broader portfolio goals.
Final Thoughts: Access Has Improved—But Discipline Still Matters
Private markets are becoming more accessible—but they have not become any simpler. They require a different level of due diligence than traditional investments.
At Capstone, due diligence goes beyond performance. It includes:
Manger Quality
Fund structure
Liquidity
Fees and expenses
Strategy and return expectations
Because in private markets, small details can have a meaningful impact on long-term outcomes.
If you’re evaluating private market opportunities, Contact Us to discuss how these investments may fit into your portfolio and read our white paper where we explore private markets due diligence in more detail.
FAQs
Q: What are private market investments?
Private market investments are assets not traded on public exchanges, including private equity, credit, real estate, and infrastructure.
Q: Why are private markets less liquid?
Because the underlying assets—like private companies or real estate—cannot be quickly sold without affecting value.
Q: Are private market investments higher risk?
They can involve different risks, including liquidity constraints, valuation uncertainty, and manager selection risk.
Q: How are private market funds structured?
Common structures include drawdown funds (limited lifespan and little to no liquidity) and semi-liquid or evergreen funds (periodic liquidity options).
Q: Why are fees higher in private markets?
These investments require more active management, sourcing, and oversight, which increases operational costs.
Q: Who should consider private market investments?
They may be appropriate for high-net-worth investors with longer time horizons and the ability to tolerate reduced liquidity.
SOURCES
https://www.sec.gov
https://www.cfa.org
IMPORTANT DISCLOSURE INFORMATION:
This informational and educational material was prepared by Capstone Financial Advisors, Inc. (“Capstone”) and is not intended to provide personalized investment advice, make a recommendation, or offer to buy or sell any security. The content reflects Capstone’s views as of the date published and may change without notice. Individuals should consult a qualified financial professional before making any investment decisions.
Private market investments involve significant risks, including illiquidity, loss of capital, long time horizons, and limited transparency. When evaluating a private fund, investors should expect to receive a core set of documents, typically a private placement memorandum, limited partnership or operating agreement, subscription materials, and relevant due diligence reports. These documents are essential to understanding what you’re buying, how the fund operates, and the risks involved. Past performance, whether of markets, asset classes, or specific managers does not guarantee future results. Any data or examples are for illustrative purposes only and do not represent the performance of any Capstone-managed portfolio. Capstone Financial Advisors, Inc. is an SEC registered investment adviser; registration does not imply a certain level of skill or training. Additional information is available on our website, at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833, and at adviserinfo.sec.gov