Retailization - Executive Summary

In our first two Sage Road Research reports, we made bullish arguments for increasing private market exposure (learn more about the reports here). The first report dove deep into the Trump administration’s efforts to deregulate the US economy. The second explored US ambitions to reshore manufacturing. Our private market case boiled down to the same basic equation for both themes. The number of publicly listed companies in the US has shrunk by roughly 50% since the mid 1990s (chart on the left). Both deregulation and reshoring are likely to increase dynamism in sectors far less represented in public markets today than in the past, from industrials and materials to financials and energy (chart on the right). Moreover, that dynamism will generate upside opportunity for small- to mid-sized companies, most of whom sit in private markets. Just consider that there are roughly 240,000 manufacturing firms in the US. The iShares US Manufacturing ETF holds just over 100 companies.

Yet, making that recommendation in both reports tweaked a concern that has been building for us for years. History attests that rapid AUM growth in asset classes with limited transparency is a recipe for asset mispricing that can lead to losses, if not systemic vulnerabilities. Private market AUM has skyrocketed over the past decade, roughly tripling between 2013 and 2023. As of year-end 2024, US private equity AUM alone had hit $3.1 trillion, according to S&P Global. As of March of this year, global private credit AUM had hit $2.5 trillion, according to the Bank for International Settlements. In 2023, Warren Buffett issued a warning about private equity:

Troubling signs have become increasingly apparent. In 2024, private market fundraising dropped 19% YoY, the third consecutive year of declines, according to PitchBook data (chart below). Distributions have also plummeted. Private equity, for one, has typically distributed 30% of net asset value per year. Recently, those distributions have fallen to 10% of NAV, according to Verdad Advisors.

Some of the past decade’s biggest backers of private markets have begun sending loud messages about mounting concern. Prominent university endowments are selling private assets at a discount to raise liquidity and increase flexibility. The process has triggered concerns about rampant asset overvaluing—Harvard alum Bill Ackman has speculated that the university’s endowment may be worth roughly 30% less than claimed. Meanwhile, the Institutional Limited Partners Association—a trade group that represents some of the US’ biggest pension funds—has launched a campaign demanding greater fee and return transparency from private equity partners, “in a bid to address simmering frustration with the industry’s disclosures,” as The Wall Street Journal reported in January. Finally, there’s been the recent collapses of Tricolor and First Brands, which has generated unease about the stability of private credit. To paraphrase Apollo’s Mark Rowan, “the desire to win in a competitive market” may have led to “shortcuts” that could trigger more “late-cycle accidents” or worse.

Industry expectations are that the slowdown in institutional investment in private markets will persist. In June, State Street released the results of its annual “Private Markets Survey”. Roughly 500 institutional investors participated, including traditional asset managers, private market managers and asset owners across North America, Europe, the Middle East and Asia-Pacific. A key finding: “LPs and GPs both predict a private/public split of 42%/58% in their (or their clients’) portfolios within three to five years’ time, which represents a slight increase in their respective current allocations of 39%/61% (LPs) and 38%/62% (GPs).”

In response to dwindling institutional inflows, the industry is turning in a new direction for AUM growth: retail investors. Individual investors account for roughly 16% of private market AUM despite controlling 50% of all global wealth, according to Bain & Company estimates (chart below). Now, the Trump administration is rewriting the regulatory playbook to break down obstacles to retail investment. Behemoth asset managers are forging partnerships and authoring product innovations to maximize retail capital recruitment. And tech upstarts are generating novel solutions for retail access, from tokenizing private assets to building exchanges for employees to list private shares.

Projections about what this could mean for private market AUM growth are staggering. State Street’s survey results suggest “the ‘retail revolution’ will drive 50% of private market flows by 2027.” Deloitte expects retail investors’ allocations to private markets to reach $2.4 trillion in the US by 2030, up from $80 billion today. And Bain projects retail interest to drive another tripling of private market AUM over the next decade, reaching a total of $62 trillion globally by 2034.

Advocates of private-market democratization undoubtedly make a compelling argument: Why shouldn’t mom-and-pop investors have the same access to private market opportunity as institutions and the ultra-wealthy? Yet, beneath that constructive aim are troubling questions: How much will a flood of retail capital degrade deal quality and exacerbate existing issues with fee and return transparency? Can funds meet the greater liquidity demands of retail investors during a market dislocation or are we one severe sell-off away from an event with contagion potential? What other less obvious vulnerabilities could emerge from this wave of product innovation?

These are some of the questions that inspired this report. We believe private markets are now an essential diversifier for investors—institutional or retail. They offer a broader opportunity set than public markets (chart on the left). They offer greater dispersion and therefore, alpha potential. Private and public markets are converging, and we see little chance that progression won’t continue. The self-perpetuating cycle that has undergirded the growth of private markets appears nowhere near an end: The more capital that flows to private markets, the longer companies are incentivized to stay private. And the longer companies stay private, the more capital will chase private market opportunity. Just consider that the average age of venture capital backed companies at IPO has increased by more than 50% since the late 1990s. That’s a lot more growth potential seized in private markets before public market investors have access (chart on the right).

However, we also believe the meteoric growth of private markets over the past decade has been, in part, underpinned by questionable, if not clearly disingenuous claims. For one, misleading performance metrics like the Internal Rate of Return (IRR) have been bandied about as proof of long-term private market outperformance relative to public markets. The reality is opaque and highly manager and market-era dependent. For another, mark downs have been manipulated to create an illusion of lower volatility—or as AQR co-founder Cliff Asness has dubbed the practice, “volatility laundering."

We believe retailization will increase private-market downside risks, requiring deeper recognition of the asset-classes’ dynamics to realize outperformance. We also believe the industry is unlikely to provide the necessary transparency to facilitate that recognition. The incentives are too blinding. Relentless fee compression has depressed profitability for public-market managers. Highly concentrated equity returns have limited the alpha potential of active managers. Persistently low volatility has meant the same for active fixed income managers. Private markets offer higher fees and less benchmark accountability. Which begs the question (as naïve as it may sound): Is the industry racing to democratize private markets because of the upside potential for clients or because of the upside opportunity for the industry?

So, we dissected the Trump administration’s deregulatory efforts and the industry’s efforts to position for a retailized future. We dug into private market performance, volatility, and systemic risk factors. We broke down how we see the opportunity set across private market categories, from private equity, private credit, and venture capital to infrastructure, natural resources, and real estate. Overall, we believe retailization will drive AUM growth, but at a lower rate than many prognosticators expect and institutions hope. Performance, liquidity, volatility, and retail investor risk and opportunity incomprehension will all hold back inflows. Nonetheless, private market investors will face a more idiosyncratic environment moving forward, one requiring greater scrutiny and more strategic intent in manager, fund, and asset selection. What follows is our roadmap for investing in that future.