The Private Equity Sales Pitch: Why the Return Assumptions Don’t Add Up
- Carson McLean, CFP
- Feb 27, 2025
- 16 min read
Updated: Oct 21, 2025
“Private equity is the future.”
“Public markets are over-picked. The real opportunities are private.”
“Institutions have been doing this for decades; it’s time for individual investors to get in.”
You’ve heard the pitch. Maybe from an advisor. Maybe in an article. Maybe from a well-dressed fund rep explaining why public markets just aren’t good enough anymore.
And for a moment, you think, maybe they’re right?
The “smartest money” in the world is deep into private markets. If they’re all in, maybe I’m the one missing something?
But then I came across a Capital Market Assumptions (CMA) survey, and I thought, this has to be a joke.
The expected return assumptions for private equity weren’t just a little higher than public markets. They were A LOT higher. [1] As if private markets had discovered a separate economic universe.
To say they were optimistic is an understatement.
Look, I don’t usually write this aggressively. But some things need to be questioned.
So why were private market returns projected so much higher?
Right on cue, I could hear the voice of the Private Equity Insider in my head:
“You just don’t get it. You’re stuck in public market thinking; misguided conventional wisdom. Private equity is different.”
I’ve met this guy before many times. He’s well-dressed, well-educated, and, let’s face it, not dumb. He’s charming, persuasive, and completely convinced that private markets are superior in every way. He isn’t trying to con anyone, he believes what he’s selling.
And when you push back, he leans in with that “I know more than you” smile and says:
“You can’t seriously believe public markets are the best we can do?”
Which brings us back to the CMAs. Are private markets really that much better?
Institutions have historically done well in private equity, but even top institutions are scaling back exposure, citing liquidity constraints, diminishing alpha, and rising borrowing costs. If they’re rethinking their allocations, why are retail investors being told to ramp up?
Why Private Equity is Being Pushed So Hard Right Now [2]
If it feels like private equity is suddenly everywhere, that’s because it is. PE firms are trying to expand their investor base and they're hunting for new capital. The institutional money that fueled PE’s golden era is tapped out. Pensions, endowments, and sovereign wealth funds are maxed out on private markets. Now, the PE machine needs fresh dollars to keep the game going.
Enter individual investors.
Over the past several decades, the collective wealth of individual investors has grown significantly, and PE firms have taken note. They’re flooding the market with glossy sales pitches, promising “exclusive access” to high-net-worth individuals, advisors, and even mom-and-pop investors. And despite all the talk of democratization, the best funds are often not available to retail investors, only the leftovers. This might be framed as making private equity more accessible to the masses, but it’s more likely about expanding to a new market opportunity.
And when I hear the industry’s latest talking points, I already know where this is going.
“A small 5-10% allocation as a diversifier really won't do you any good. If you really want to have a positive impact on your portfolio you need to see it as a core asset class. 20-40% is what we typically see.”
Of course it is! because what’s the point of a small allocation if the real goal is to expand a potential fee base?
In recent years, PE firms and their industry groups have lobbied aggressively to loosen restrictions on private market investments for retail investors. The SEC’s 2020 expansion of accredited investor definitions and the rise of interval funds and semi-liquid private equity vehicles were not organic market shifts, they were engineered to increase capital access for private fund managers. Even now they are pushing to create access to 401ks.
These firms aren’t responding to demand; they’re engineering it to capture a fresh wave of investor dollars. This isn’t about the sharpest minds quietly building real businesses. It’s about the mass-market narrative being sold aggressively to investors who may not know the tradeoffs.
Some niche private equity and strategic acquirers do great work, but they aren't knocking on your door. If you're seeing it in a glossy pitch deck, you're not getting the golden goose.
Here is what advisors and their clients are constantly hearing from PE, which is now being pitched universally.
Private Equity’s Hands-On Myth: Who’s Really in Charge? [3]
PE Insider:
Private equity managers don’t just pick companies; they take control, restructure, and unlock value through hands-on management. They give you direct co-investment with the best deals. That’s the real edge over public markets.
Me:
That sounds great, except the firms actually improving businesses aren’t the ones aggressively courting retail investors. The best private equity firms don’t need this much extensive outside capital; they either use their own or work with a select, trusted group of long-term partners. The ones knocking on retail’s door? They aren’t selling management skill, they’re selling access. And that ‘exclusivity’ is just another product.
There are two private equity worlds, and they are not the same:
1. The Private Equity You Wish You Had Access To
This is what the sales pitches promise, but retail investors probably aren't actually getting. The best co-investment deals that are tough to get into, even for institutions. Or they are strategic acquirers that are often self-funded and tightly held and focused on businesses with specific industry expertise and manage them for long-term cash flow and typically not quick flips.
Selective aquireers. Think niche industries like food production, specialized manufacturing and services, or logistics, where owners understand the business at an operational level and make decade plus long investments to create value. They are strategic acquirers.
General Partners (those managing the funds) only have so many top deals and will bring them to their largest limited partners. They are typically are oversubscribed and selective with who they work with. You are getting co-investment with shared or reduced costs.
Ultra high net worth investors can also fall into this camp. They buy companies with the intention of keeping them and running them efficiently, not just dressing them up for resale.
2. Mass-Market Private Equity, What You're Usually Getting
This is what’s actually being pushed into retail portfolios, firms that don’t focus on running businesses or reserving the best deals, but instead focus on gathering assets to fuel deals. This is the middle market, and typically not the top quartile performers. Their playbook depends on:
Leverage – A classic double-edged sword. It boosts returns in good times but magnifies losses when markets turn.
Fee extraction – The real winners aren’t the investors; they’re the firms collecting management, transaction, and performance fees, whether or not the deals work out.
Just because a retail PE fund claims co-investment opportunity, it doesn't mean you are getting the best co-investment options.
What About Large RIAs with In-House PE Teams?
Some wealth firms now promote their own private equity deals as a differentiator: "We source exclusive private investments just for our clients."
Sounds compelling. But here’s the issue:
Who’s vetting these deals?
What's the track record?
Without standardized reporting, independent verification, or clear long-term performance data, how do clients know if these deals are actually good investments, or their long term results and risks.
Some firms may source solid opportunities, but without transparency, clients have no way of knowing whether they’re getting quality or just being pitched a shiny object.
The Illiquidity Premium is Real, But You're Probably Not Capturing It [4]
PE Insider: Sophisticated investors understand that liquidity comes at a cost. The illiquidity premium is a reward for patience. Long-term investors who can lock up capital are compensated with higher returns.
Me: Yes, in theory. But show me where retail investors are actually capturing that premium net of fees and taxes.
The illiquidity premium is one of private equity’s favorite talking points: lock up your capital for a decade, and in return, you’ll get higher returns.
And to be fair, the theoretical case makes sense, investors should be compensated for giving up liquidity.
But that compensation doesn’t exist in a vacuum. Fees, taxes, and structural inefficiencies eat away at it before investors ever see the benefits.
Private equity’s historic outperformance has shrunk dramatically; net of fees, it’s often erased entirely. After adjusting for leverage, sector tilts, and illiquidity, PE returns closely track public micro cap stocks, except with higher fees and no liquidity.
So, what are investors actually getting in exchange for locking up their money?
"Yes, in exchange for locking up your money for seven years, you too can achieve…market-like returns ... minus the liquidity ... and a hefty fee structure."
If this premium really existed net of all costs, institutions wouldn’t be quietly reducing their PE allocations.
But they are, because net returns aren’t living up to the sales pitch. The illiquidity premium is real, but it doesn't mean you're capturing it.
Leverage is a Feature, Until It’s a Bug [5]
PE Insider: Leverage is a tool, not a risk. We use capital structure optimization to enhance returns and create value in ways public companies simply can’t. That’s why private equity has historically outperformed.
Me: It’s not magic. It’s debt. And debt works great, until it doesn’t.
PE calls it “financial engineering.” But at the end of the day, it’s just leverage. And leverage cuts both ways. When markets are strong, it amplifies returns. But when things go south? It amplifies losses.
For years, PE firms drowned companies in cheap debt and called it ‘alpha.’ Now the bills are coming due. Defaults are mounting, refinancing costs have doubled, and PE-backed firms are now failing at nearly twice the rate of non-PE-backed firms. Turns out leverage wasn’t just a return enhancer, but could also be a ticking time bomb.
Some argue that PE firms get better lending terms than traditional borrowers, but a rate is still a rate. Even if they negotiate slightly better margins, they still live in the same financial world as everyone else. And since most PE deals run on floating-rate debt, their borrowing costs have skyrocketed alongside interest rates.
You will often hear that "sophisticated capital structures" are built to to handle it. Translation? They’re scrambling to push off the pain. Restructuring, extending terms, pretending things will magically get better before the bills come due.
Leverage is like playing with matches. It’s great, until the whole economy catches fire, and suddenly, those ‘alpha-generating’ deals are up in smoke.
If PE’s secret sauce was leverage, and leverage is now more expensive and more dangerous, what’s left?
Volatility Laundering Isn’t Risk Management [6]
PE Insider: Private equity offers lower volatility than public markets. Without daily price swings, our investors stay focused on long-term value, not short-term noise.
Me: Because you don’t report losses until you’re forced to. That’s not lower volatility, it’s just delayed bad news. The difference? Public market investors see risk in real-time. Private equity investors? They get to find out the damage months or years later, when it’s too late to do anything about it.
Here’s the most brilliantly deceptive feature of private equity: it looks stable. Not because it is, but because you don’t see the full picture.
In public markets, stock prices move every second. Investors may not like the noise, but at least they see the risks in real-time. In private equity? There’s no daily price. No real-time losses. No panic-selling.
And that’s exactly why the illusion works.
"Look at our smooth returns". But a public market investor who only checks their portfolio on a multiple-quarter lag would most likely see the same ‘stability.’
The difference? Public investors at least have insight on the risks that are playing out. PE investors are locked in, forced into “discipline” not by choice, but by structure. Proper planning and coaching can guide self discipline in public markets without the extra fees.
Reported PE returns can be distorted, whether through performance metrics like IRR that front-load returns and obscure true investor outcomes, or through opaque valuation methods that delay recognizing losses.
You can’t measure risk if you don’t see it, and in private equity, you may not see it until it’s too late.
Less Efficient Market ≠ Easy Money [7]
PE Insider: Public markets are hyper-efficient. Every possible insight is priced in almost instantly. Private markets, on the other hand, have less information flow, and that’s where skilled investors can step in and exploit inefficiencies. You don’t want median managers, you want top-quartile managers.
Me: Yes, private markets are less efficient, just pick the winners. Simple. Except that recent data shows top-quartile performance in private equity is as fleeting as in active public fund management.
Private equity proponents claim inefficiency means easy alpha. But what matters is whether investors can reliably exploit those inefficiencies, or gain access to the managers who actually do.
A lack of information doesn’t mean easy profits; it means valuations are murky, and execution risk is high. If private market inefficiencies were so easy to exploit, private equity’s historical outperformance wouldn't be fading.
There is a massive dispersion of returns between top firms and "the rest", and those top managers are much more selective in who they partner with.
Even if you could pick or get into the best managers, there’s a problem: top-quartile buyout funds persistence has collapsed over time too. Just like public markets, today’s top PE managers are unlikely to be tomorrow’s. So saying ‘just invest in the top quartile managers’ is as helpful as saying ‘just buy the stocks that go up.’
Fees, Not Returns: The Retail Push is About Profits, Not Performance [8]
PE Insider: For decades, private equity was the secret weapon of the ultra-wealthy. Now, we’re bringing those same exclusive strategies to Main Street, without the ultra-high fee
Me: Coming down from what? Outrageous to merely excessive? And for what? Retail investors aren’t getting ‘exclusive access’. Institutions take the best deals, and what’s left is repackaged for mass distribution, with layers of fees slapped on top. But hey, congratulations, we're finally invited to pay for it.
Retail-focused PE funds still charge north of 100bps in every case, often much more. Some of these funds are structured to look cheaper than the traditional 2 & 20 model, but fees are just buried elsewhere. Management fees. Performance fees. Transaction fees. Monitoring fees. The list goes on.
And what do retail investors actually get? Not the top-tier funds, not the best deals, often a pre packaged fund of funds.
This isn’t democratization, it’s extraction.
The top PE firms aren’t opening their best funds to retail because they don’t need to. The ones aggressively expanding into retail? They’re not looking for partners, they’re looking for a new revenue stream.
“Retail investors deserve access to private markets." Translation: We need your capital because institutions are tapped out and this is a massive opportunity for us.
If private equity was the game-changer they claim, they wouldn’t need to lobby this hard to get your money.
They aren’t letting you into the club, they’re handing you the bill.
A Diversifier, Not the Holy Grail [9]
Private equity isn’t snake oil, but it’s not the miracle it’s made out to be either, especially now that you have more capital chasing fewer deals.
Sure, perhaps a moderate 5-10% allocation can serve as a diversifier depending on your circumstances, but adding complexity (illiquid commitments, unpredictable capital calls, opaque valuations, tax headaches, and layers of fees) doesn’t always lead to better outcomes.
This brings us back to the Capital Market Assumption survey. It suggested private equity would outperform public equities by 275 basis points annualized over the next 20 years. Think about that. 2.75% per year. Compounded. For two decades.
U.S. Large Growth might be ‘overvalued,’ but PE? Apparently, it’s a cheat code, one that leaves every other asset class in the dust. Tempting… but call me skeptical.
We’ve addressed several key narratives:
Hands on company operators - The best private equity firms don’t need retail capital, they invest their own capital or work with a select few. The ones knocking on your door? They aren’t selling management skill; they’re trying to scale.
Illiquidity premium? It may exist, but after fees and taxes, you’re probably not capturing it.
Leverage can juice returns, but it also magnifies risk, and the days of easy, cheap debt are not what they were.
Lower volatility? That’s just a reporting illusion.
Inefficiencies? Maybe, but opacity is the real issue. When valuations are murky and information is scarce, the house almost always wins, not you.
Access to elite deals? Institutions get the best. You get what’s available.
And the push into retail? It’s not about delivering better returns. It’s about finding a new fee base.
The pitch is compelling. The reality is far messier.
And yet, I can still hear the Private Equity Insider in my head.
PE Insider: You just don’t get it.
Me: No, I do. That’s exactly why I’m cautious.
The best investments don't need to be overly complex. They don’t rely on capital market assumptions that look like fantasy, they don’t come wrapped in a glossy pitch deck, they don't need to be lobbied for aggressively, and they definitely don’t need to be sold to you. To me, it just doesn’t add up. Investors and advisors need to scrutinize the fine print.
About the Author
Carson McLean, CFP®, is the founder of Altruist Wealth Management, a flat-fee fiduciary firm focused on real financial planning—not investment sales. With over 15 years in the industry, including time at Dimensional Fund Advisors,he takes a diligence-before-hype approach to helping high-net-worth investors make smarter portfolio decisions.
Disclosure:
This analysis reflects my perspective as a fiduciary advisor committed to transparency and evidence-based investing. It is for educational purposes only and should not be considered personalized investment advice.
Private equity carries risks (including illiquidity, complex fee structures, and valuation uncertainty) that may not always be fully understood by investors or even fully appreciated by advisors. While fees and risks are disclosed, they are often structured in ways that make direct comparisons to public markets difficult. Investors should carefully assess whether the added complexity and trade-offs align with their financial goals.
Past performance does not guarantee future results. As a flat-fee, fee-only, fiduciary, I do not receive compensation for recommending or rejecting private equity investments, to ensure my analysis remains objective.
Footnotes
Example Capital Market Assumption
Horizon Actuarial – "2024 Capital Market Assumptions Survey"
The report compiles return projections from major asset managers, showing that private equity return assumptions are significantly higher than public market projections. This reflects industry optimism on the space.
Why Private Equity is Being Pushed So Hard Right Now
Institutional Investor – "Why Private Equity is Going After Retail Investors" (2024)
Private equity firms, facing a slowdown in institutional inflows, are aggressively expanding into retail markets, positioning PE as a core portfolio allocation for individual investors.
Bain & Company – "Why Private Equity is Targeting Individual Investors" (2023)
The report highlights the increasing focus on retail investors as institutional capital inflows slow. It details how PE firms are expanding into the mass market, projecting double-digit growth in individual investor allocations while traditional sources (pensions, endowments) are tapped out.
CEM Benchmarking – "Benchmarking Private Equity Portfolios of the World’s Largest Institutional Investors"
The study reveals that institutional investors, including pension funds and endowments, are scaling back PE allocations, citing declining net returns and fee inefficiencies. This trend contradicts the retail narrative that PE should be a growing core allocation.
Private Equity’s Hands-On Myth: Who’s Really in Charge?
Institutional Investor – "Why Private Equity is Going After Retail Investors" (2024)
Many retail-accessible private equity vehicles function as funds-of-funds, layering additional management fees rather than actively managing businesses. These structures prioritize capital inflows over operational expertise, contradicting the traditional "hands-on" PE narrative.
Kent Clark Center – "Retail Investor Participation in Private Equity" (2024)
A survey of leading professors suggests that retail investors have limited access to top-quartile private equity funds, reinforcing concerns that mass-market PE is structurally different from the elite firms managing institutional capital.
Wellington Management – "The Impact of Higher Interest Rates on Private Equity" (2024)
With rising interest rates reducing the effectiveness of leverage, private equity firms must demonstrate true operational expertise rather than relying on financial engineering.
The Illiquidity Premium is Real, But You're Probably Not Capturing It
Phalippou, Ludovic – "An Inconvenient Fact: Private Equity Returns & the Illiquidity Premium," SSRN (2020)
Phalippou argues that private equity’s illiquidity premium is often erased after fees and leverage adjustments.
AQR Capital – "Demystifying Illiquid Assets: Expected Returns for Private Equity" (2023)
The study examines the illiquidity premium in private equity, arguing that after adjusting for leverage, fees, and risk, PE returns closely track public small-cap value stocks. This raises doubts about whether investors truly capture excess returns in exchange for locking up capital.
Leverage is a Feature, Until It’s a Bug
Financial Times – "Defaults on Leveraged Loans Soar to Highest Rate in 4 Years" (2024)
The article highlights that U.S. companies are defaulting on junk loans at the fastest rate in four years, struggling to refinance a wave of cheap borrowing amid rising interest rates. This underscores the growing risks of excessive leverage, particularly for private equity-backed firms that relied on low-cost debt to drive returns.
Transacted – "Private Equity Portfolio Defaults Hit 17% as Leverage Risks Mount, Moody’s Says" (2024)
Moody’s reports that private equity-backed companies experienced a 17% default rate between January 2022 and August 2023, double that of non-sponsor-backed speculative-grade borrowers. This highlights the risks associated with high leverage in private equity deals, particularly as borrowing costs rise.
Volatility Laundering Isn't Risk Management
Transacted – "Private Equity Portfolio Defaults Hit 17% as Leverage Risks Mount, Moody’s Says" (2024)
Moody’s reports that private equity-backed companies experienced a 17% default rate between January 2022 and August 2023, double that of non-sponsor-backed speculative-grade borrowers. This highlights the risks associated with high leverage in private equity deals, particularly as borrowing costs rise.
Kent Clark Center – "Public and Private Equities Survey" (2024).
A survey of leading finance professors from top research universities found that private equity’s reported stability is largely a function of infrequent mark-to-market pricing rather than true lower volatility. This supports concerns that private markets delay loss recognition, creating the illusion of smoother returns.
Asness, Cliff – "Why Does Private Equity Get to Play Make-Believe With Prices?" Institutional Investor (2023).
The article critiques private equity’s valuation practices, arguing that infrequent mark-to-market adjustments obscure true volatility. This “volatility laundering” makes PE appear more stable than it actually is, misleading investors about risk.
Oaktree Capital – “You Can’t Eat IRR” by Howard Marks (2006).
Marks explores how IRR can be misused as a measure of performance in private investments, particularly when actual investor outcomes are shaped by capital timing, reinvestment rates, and fees.
Less Efficient Market ≠ Easy Money
Institutional Investor – "Why Private Equity is Going After Retail Investors" (2024).
Retail-focused PE funds often suffer from a lack of standard reporting and performance data, making true risk-adjusted comparisons difficult for investors.
CFA Institute – "The Tyranny of IRR: A Reality Check on Private Market Returns" (2024).
Discusses how IRR-based performance metrics exaggerate private market returns, making it harder for investors to accurately assess risk-adjusted performance. This contributes to the myth that private markets consistently outperform public investments.
Harris, Robert S., Tim Jenkinson, and Steven N. Kaplan – "Private Equity Performance: What Do We Know?" Journal of Empirical Finance (2023).
The authors analyze private equity performance relative to public markets, challenging the assumption that private markets inherently offer superior returns due to inefficiencies.
AQR Capital – "Demystifying Illiquid Assets: Expected Returns for Private Equity" (2023).
Analyzes private market inefficiencies, showing that PE returns do not consistently outperform public markets once adjusted for leverage, illiquidity, and sector exposure. Challenges the assumption that private markets provide easy alpha.
Fees, Not Returns: The Retail Push is About Profits, Not Performance
Institutional Investor – "Why Private Equity is Going After Retail Investors" (2024).
Interval and tender offer funds marketed to retail investors often charge significantly higher fees than traditional institutional private equity, with total costs reaching as high as 5.49%.
Phalippou, Ludovic – "An Inconvenient Fact: Private Equity Returns & the Illiquidity Premium." SSRN (2020).
Phalippou argues that private equity’s fee structures significantly reduce investor net returns, benefiting fund managers over retail investors. He finds that a large share of PE’s historical outperformance disappears once high fees and illiquidity costs are accounted for.
Bain & Company – "Why Private Equity is Targeting Individual Investors" (2023).
The report notes that private equity’s retail expansion is a deliberate strategic shift, rather than a response to organic demand. PE firms are positioning retail allocations as a new growth engine amid institutional funding constraints, raising concerns about whether investor outcomes or fee generation is the true priority.
A Diversifier, Not the Holy Grail
Dimensional Fund Advisors – "A Deep Dive into Private Fund Performance" (2024).
A comprehensive study analyzing over 6,000 private funds from 1980 to 2022, examining net-of-fee returns, risk-adjusted performance, and comparisons to public market equivalents. The findings suggest that private equity’s historical outperformance largely aligns with small-cap value stocks once adjusted for leverage, illiquidity, and sector tilts. The report also highlights the impact of high fees on net investor returns and questions whether retail investors are capturing the benefits often touted by PE proponents.
