The Hidden Risks of Private Equity — And Why We Stay Away
Private equity has spent the last decade being marketed as the “smart money” corner of investing. Exclusive. Sophisticated. Higher return. Lower correlation. A better alternative to public markets.
That story sells well.
But the reality underneath it is far more complicated — and far more dangerous — than many investors realize.
At William Allan, we do not allocate client capital to private equity. That decision is not ideological. It is based on structure, transparency, liquidity, leverage, and the very real systemic risks that private equity introduces — not just to portfolios, but to the broader economy.
This article explains why.
What Private Equity Really Is
At its core, private equity is capital invested into privately held companies, often through leveraged buyouts. These firms typically:
Acquire businesses using large amounts of borrowed money
Seek to cut costs aggressively
Aim to exit within 5–10 years through a sale or IPO
Prioritize return maximization over business durability
The model depends on leverage, financial engineering, and favorable exit conditions.
When markets are cooperative, it can appear highly successful.
When conditions tighten, the weaknesses surface very quickly.
The Illusion of Stability
One of private equity’s biggest selling points is “low volatility.” That appearance is misleading.
Private equity assets are not repriced daily like public markets. They are valued periodically, often by the same parties who benefit from higher valuations. There is no continuous price discovery. No daily accountability. No real-time reality check.
That creates a dangerous illusion:
Risk that doesn’t move looks like risk that doesn’t exist.
It does exist. It just doesn’t show up until it shows up all at once.
Leverage Is the Real Engine — And the Real Threat
Private equity returns are not primarily driven by superior business performance. They are driven by debt. Many acquired companies are loaded with leverage immediately after purchase. That debt:
Increases short-term returns
Magnifies downside risk
Makes businesses fragile during economic slowdowns
Shifts risk from investors onto employees, vendors, and communities
In a tightening credit environment, that leverage becomes a choke point. Refinancing becomes harder. Interest costs rise. Margins compress. Defaults increase.
This is not theoretical. It is structural.
Liquidity Risk Is Constantly Underestimated
Private equity is fundamentally illiquid. Investors cannot exit when they want. They exit when the fund allows. That matters far more than people think.
During periods of market stress:
Capital gets trapped
Redemptions are gated
Valuations lag reality
Losses surface late and violently
Liquidity is not a luxury in investing.
It is a form of risk control.
Once you give it up, you no longer control your timeline.
Why Private Equity Poses Broader Economic Risk
This goes beyond individual portfolios.
Private equity now owns:
Hospitals
Nursing homes
Housing portfolios
Retail chains
Manufacturing firms
Infrastructure-adjacent businesses
When leveraged financial structures control essential services, the risks become systemic:
Workers absorb the downside through layoffs and wage compression
Communities absorb the damage through business closures
Credit markets absorb the shock through loan defaults
Consumers absorb the impact through higher prices and reduced service quality
If a large enough portion of this leveraged ecosystem destabilizes at once, the spillover effects reach public markets, banks, pensions, and employment simultaneously.
That is how localized leverage becomes macro-economic pressure.
Return Marketing vs. Return Reality
Private equity is often marketed on “outperformance.” What is rarely discussed is:
Survivorship bias
Smoothed valuations
Heavy use of leverage
Long lock-ups that prevent true benchmarking
Selective reporting during weak cycles
In simple terms:
Returns are advertised in a way that minimizes visible risk and maximizes perceived certainty.
That’s not investing. That’s packaging.
Why We Do Not Use Private Equity
We do not allocate to private equity because:
We believe liquidity matters
We believe price transparency matters
We believe leverage should be controlled, not embedded
We believe clients deserve daily accountability
We believe durable wealth is built through real cash flows, not financial engineering
We focus on assets where risk is visible, measurable, and manageable — not hidden behind quarterly marks and gated exits.
The Economic Implication Investors Should Not Ignore
Private equity thrives when:
Credit is cheap
Liquidity is abundant
Exit markets are strong
That environment is not permanent.
When the cycle turns — and cycles always turn — leveraged structures unwind in reverse order. What looked stable becomes fragile. What looked diversified becomes correlated. What looked controlled becomes forced.
That is not just a portfolio issue.
That is an economic transmission mechanism.
The Bottom Line
Private equity is not inherently evil.
But its structure, leverage, opacity, and illiquidity create risks that most investors are not properly compensated for.
The greatest danger is not volatility.
The greatest danger is delayed recognition of risk.
By the time the losses become visible, control is already gone.
We believe in owning real businesses with real cash flows, daily liquidity, transparent pricing, and disciplined risk control.
Not financial black boxes.
A Clear Philosophy
We don’t chase exclusivity.
We don’t trade liquidity for marketing.
We don’t outsource risk visibility.
We build portfolios designed to withstand cycles — not depend on them.
This content is for informational purposes only and should not be considered investment advice. Past performance does not guarantee future results. Investing involves risk, including possible loss of principal.
