Retail Investor Participation in Private Equity

Retail investors account for a large share of global wealth, but a small share in private equity holdings. (see link: https://bain.com/insights/why-private-equity-is-targeting-individual-investors-global-private-equity-report-2023/)

A reduction in the barriers to all retail investors investing in private equity funds - notably regulatory restrictions on investor wealth/income and on liquidity - would substantially improve household welfare.

Responses weighted by each expert's confidence

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Disagree
7
Bio/Vote History
I doubt that many individual investors are sophisticated enough to understand the fee structure and hidden risks of private equity. I agree that the income and wealth barriers to participation are crude and could be improved (for example by using online education and testing).
Cochrane
John Cochrane
Hoover Institution Stanford
Agree
8
Bio/Vote History
A small paternalist regulation that one might as well clean up. No, the little dears are not too dumb to invest their money and caveat emptor. No big increase in welfare unless PE expands a lot. A small sock drawer of the hoarder nightmare of our financial regulatory mess.
Cornelli
Francesca Cornelli
Northwestern Kellogg Did Not Answer Bio/Vote History
Diamond
Douglas Diamond
Chicago Booth
Disagree
7
Bio/Vote History
These investments are too opaque for smaller investors and have very high fees.
Du
Wenxin Du
HBS
Disagree
8
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Disagree
8
Bio/Vote History
In 2020, SEC relaxed the retail constraints. Being "rich" is no longer required. Moreover, agency-based access to PE (e.g. through BlackRock, Vanguard, etc.) is available and probably more effective for most retail investors, given the complexity of limited partnerships.
Eberly
Janice Eberly
Northwestern Kellogg Did Not Answer Bio/Vote History
Fama
Eugene Fama
Chicago Booth
Uncertain
10
Bio/Vote History
Private equity investing is now somewhat opaque. No solid information is provided to investors except at times of major events. The regulation of private equity reporting would have to change a lot if it were open to smaller retail investors.
Gabaix
Xavier Gabaix
Harvard
Agree
6
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Uncertain
5
Bio/Vote History
Graham
John Graham
Duke Fuqua
Disagree
8
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Agree
8
Bio/Vote History
Relaxing this regulatory constraint should improve welfare. In 2016, Canada adopted an exempt status to allow non-accredited investors to make limited private equity investments. More generally, US definition of accreditation should change: it is based on wealth not knowledge.
Hong
Harrison Hong
Columbia Did Not Answer Bio/Vote History
Jiang
Wei Jiang
Emory Goizueta
Disagree
6
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Uncertain
4
Bio/Vote History
Benefit is opening up set of available investments. Potential cost is excessive fees.
Kashyap
Anil Kashyap
Chicago Booth
Uncertain
3
Bio/Vote History
substantial improvement is a high bar
Koijen
Ralph Koijen
Chicago Booth
Agree
4
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
Strongly Agree
8
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Disagree
7
Bio/Vote History
Retail investors would be likely to disproportionately invest in underperforming PE funds. Due to weak disclosure requirements, retail investors would be less able to ascertain fund / manager quality. Moreover, the best funds would be more likely to limit participation.
Ludvigson
Sydney Ludvigson
NYU
Agree
7
Bio/Vote History
Maggiori
Matteo Maggiori
Stanford GSB
Disagree
2
Bio/Vote History
On the margin, more participation could be good (as in risky assets in general), but one worries about investors getting into illiquid unsuitable products for their level of financial sophistication
Matvos
Gregor Matvos
Northwestern Kellogg
Uncertain
8
Bio/Vote History
Welfare will increase for sophisticated retail investors through the benefits of diversification. A segment of the financial industry will offer very shoddy PE products, which will decrease the welfare of unsophisticated retail investors. The net effect is difficult to evaluate.
-see background information here
Moskowitz
Tobias Moskowitz
Yale School of Management
Disagree
5
Bio/Vote History
Retail investors will likely get adversely selected against, especially in illiquid private markets. They also have more stringent liquidity needs and the slow marking of private valuations that benefits institutions likely hurts retail investors.
Nagel
Stefan Nagel
Chicago Booth
Disagree
8
Bio/Vote History
Many participating retail investors would be pulled into illiquid high-fee products with low after-fee returns and minor incremental diversification benefits
Parker
Jonathan Parker
MIT Sloan
Disagree
4
Bio/Vote History
Sophisticated investors can invest in private equity already. Small retail investors are unlikely to benefit from more complex investments or contribute to efficient allocation of capital. Firms that want to raise capital from retail investors can tap public markets.
Parlour
Christine Parlour
Berkeley Haas
Uncertain
8
Bio/Vote History
Implementation will be important. There are obviously large diversification/wealth benefits for smaller investors.
Philippon
Thomas Philippon
NYU Stern
Uncertain
1
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Uncertain
7
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
Agree
8
Bio/Vote History
Long-term investors would benefit from low-cost access to more illiquid investments.
Sapienza
Paola Sapienza
Northwestern Kellogg Did Not Answer Bio/Vote History
Seru
Amit Seru
Stanford GSB
Uncertain
7
Bio/Vote History
Stambaugh
Robert Stambaugh
UPenn Wharton
Uncertain
7
Bio/Vote History
Seems a challenge to have retail products that successfully address the liquidity issue while still replicating returns associated with traditional private equity where illiquidity seems inherent.
Starks
Laura Starks
UT Austin McCombs
Uncertain
1
Bio/Vote History
While retail investors could benefit from being able to invest in private equity funds, it is not clear they would benefit from investment in all private equity funds. The selection process may not be to the retail investors' advantage.
Stein
Jeremy Stein
Harvard
Uncertain
1
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern Did Not Answer Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Strongly Disagree
9
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Disagree
7
Bio/Vote History
Research shows that private equity (buyouts, VC, real estate, infrastructure) funds do not generate positive risk-adjusted return, relative to traded risks in public markets. In the long-run some risks may no loner be available in public markets, however.
-see background information here
Whited
Toni Whited
UMich Ross School
Disagree
4
Bio/Vote History