Investing in Private Assets

Private assets do have a role in a fully diversified portfolio, but discretion in marking values to market makes it easy to conceal risks which is dangerous for less sophisticated investors including typical 401(k) investors.

Should be legal. Wise? The attraction is supposedly better returns, not diversification, low correlation. A lot of volatility and beta laundering. A bit closer to true market portfolio I guess. And good regulatory / tax competition against onerous treatment of public securities.

Diversification benefit versus smaller-investor access costs and heterogeneous investor sophistication. There is also evidence (e.g., Begenau et al) that less sophisticated investors may pay much bigger fees.
-see background information here

In principle diversification should incorporate as many distinct assets as possible. In practice, some assets are costly to hold, eg, they may be opaque and have information costs, requiring input from informed agents who extract fees, which overcome the diversification benefit.

Depends on the sophistication of the investor and the investor's willingness to bear risk.

The first problem is the lack of vehicles for 401k. There are only a few PC ETFs (e.g., Virtus) and not that many PE ETFs (iShares has some). The second prob is the lack of quality of the ETFs. Institutional investors get the best deals and retail investors gets the leftovers.

Strong evidence that private equity and credit provide diversification benefits over public securities at institutional level. Uncertainty in my answer is driven by question of whether 401K investors will get lower returns through higher fees and / or adverse selection.

While this can be valuable in principle, it depends on the implementation in terms of fees, which assets are being included / offered. Those issues are already important with public assets and are even more important here.

Diversification can be improved with a wider set of assets

While these assets are a growing portion of the economy, fees to invest in them can be quite high.

The opacity, illiquidity, and potential for conflicts of interest in the way private assets are currently traded, make them unsuitable for household retirement funds

Not clear how diversifying private equity and credit are since they are not marked to market so it is difficult to know their true risk and correlation to public markets. However, if there is a liquidity premium in privates, then it might make sense for retirement portfolios.

Given the small historical alpha of private assets for institutional investors(which is likely an optimistic estimate of future alpha) and the additional fees that would be layered retail, private assets are unlikely to improve a well-diversified portfolio of public assets

Private assets are private for many reasons, most of which imply that 401k investors investing in private assets would pay high fees or get low returns. If private assets are private only because of burdensome regulation of being public, then change the regulation.

These assets classes are complex, their valuation is more difficult, they are illiquid and they require greater sophistication

Uncertain: empirically gauging risk characteristics of private is more difficult, and thus diversification benefits are unclear. I'm not sure if private offers exposure to unique systematic risks, or if it just scales up or down risk exposures already available within public.

It depends on the quality of the assets available.

The best PE deals are not offered to retail investors, the fees are high and retail investors can’t evaluate the offers.

Average PE and PC fund does not generate positive risk-adjusted profits. Also illiquid which makes asset decumulation and rebalncing difficult.
-see background information here