Private Equity: Liquidity, Fees, and Investment Risks

Written by the William Allan team · Published 2025-12-08

Private equity is often presented as a source of access, diversification, and return potential beyond public markets. It can also involve substantial leverage, long holding periods, limited liquidity, complex fees, and valuations that are updated less frequently than public-market prices. Neither the benefits nor the risks are the same across every fund.

A preference for publicly traded investments can reflect a need for pricing visibility and liquidity. It does not establish that private equity is unsuitable for every investor.

Potential Benefits

Private funds may give investors exposure to businesses that are not publicly traded. A long investment horizon can allow managers to pursue operational changes without reacting to daily market prices, and experienced managers may contribute industry knowledge, governance, or access to capital. Some investors also use private assets as one part of a broader allocation.

These potential benefits are uncertain. Outcomes vary widely by manager, vintage year, strategy, fees, financing, and exit conditions. Access to a private fund does not itself establish quality or diversification.

Illiquidity and Timing

Private-equity interests commonly have multi-year terms and limited transfer rights. Capital may be called over time, distributions are controlled by the fund, and an investor may be unable to sell when cash is needed. That can make the investment inappropriate for investors whose spending needs, reserves, or other obligations require flexibility.

Illiquidity can also make comparisons difficult. Public securities are repriced continuously, while private holdings are valued periodically using estimates and available transaction data. Smoother reported values do not necessarily mean lower economic risk.

Leverage, Fees, and Manager Selection

Many private-equity strategies use borrowing at the fund or portfolio-company level. Leverage can increase gains when an investment performs well and magnify losses when operating results, interest rates, or exit markets deteriorate. It is an important risk, but the amount and structure differ across funds.

Investors should also examine management fees, performance allocations, fund expenses, transaction fees, subscription facilities, valuation methods, and conflicts involving affiliated transactions. Manager dispersion can be significant, and past fund results do not establish what a new fund will achieve.

Comparing a Public-Market Approach

Publicly traded securities can provide daily pricing, account-level visibility, and more flexibility to adjust a portfolio. Public-market investing has its own material limitations, including market volatility, concentration, company-specific losses, behavioral mistakes, taxes, and trading costs. Liquidity makes prices visible; it does not prevent losses.

For an investor considering private equity, the relevant questions include whether the investment fits the investor's time horizon, liquidity needs, sophistication, tax circumstances, overall allocation, and ability to bear a complete loss. Fund documents and the advice of qualified legal and tax professionals should be reviewed before committing capital.

Further reading: SEC overview of private-equity funds.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.