Should You Invest in Private Equity or Private Debt?

You may have heard others discussing private investments, or your financial advisor may have suggested them. Interest in private markets has risen recently for good reasons, but there are also reasons to be cautious. Below is a clear, practical overview of what private investments are, why they attract attention, what benefits and drawbacks they present, and how retail investors can gain exposure.

What are private investments?

Private investments refer to financial assets that are not traded on public exchanges. This broad category includes private equity, private debt, venture capital, private real estate vehicles, infrastructure funds and other alternative strategies often grouped under “hedge funds.” Historically, private investments were mostly available to accredited investors—individuals with high net worth or income—or to institutional investors. Private asset managers typically required large minimum investments and long lock-up periods, making these opportunities accessible mainly to wealthy investors.

Regulatory and product changes in recent years have expanded access. For example, rule changes that allowed mutual funds and “liquid alternative” products have made some private-like strategies available to more ordinary investors through pooled vehicles that offer greater liquidity and lower minimums than traditional private funds.

Why are people talking about private assets?

Two important trends explain the growing attention to private assets. First, the number of companies listed on public exchanges has declined in many developed markets, shrinking the universe of public securities. For instance, the number of operating companies on the Toronto Stock Exchange dropped to 712 at the end of 2023 from about 1,200 around 2000. Similarly, U.S. listings have fallen from roughly 8,000 in the late 1990s to about 4,300 today. With fewer public options, investors and capital seekers have increasingly turned to private markets.

Second, large institutional investors—pension funds, sovereign wealth funds and endowments—began allocating more capital to private investments around three decades ago. That shift prompted growth in private equity firms, private credit managers and other private asset specialists that buy, develop and eventually sell companies or assets over multi-year holding periods. The flow of money into private equity has increased substantially since the 2008 financial crisis.

Another driver is correlation: stocks and bonds have shown higher positive correlation at times, most notably when both asset classes fell together in 2022. That outcome increased interest in assets that may behave differently from traditional stocks and bonds, pushing both institutional and retail investors to consider private markets for diversification.

What can private investments add to my portfolio?

Investors generally consider private investments for two reasons:

• Diversification: Private assets often exhibit different return patterns than publicly traded stocks and bonds. When their performance is less correlated with public markets, they can smooth portfolio volatility and provide alternative sources of return.
• Potentially higher returns: Many studies and reports suggest private equity has outperformed public markets over several decades. However, this evidence is often debated. Private asset performance can reflect long holding periods, active management and illiquidity premiums. There are no broad, publicly traded indices that perfectly capture private market returns, and comparability across time and strategies is limited.

What are the drawbacks of private investments?

Private investments carry distinct risks and trade-offs that investors should consider carefully:

• Illiquidity: Traditional private funds typically lock up capital for many years—often seven to 12 years. Even evergreen structures that allow ongoing investing and redemptions usually impose restrictions on how often and how much you can withdraw.
• Less regulatory disclosure: Private funds are not subject to the same public reporting requirements as listed companies. While well-known managers offer some comfort, their products can also carry higher fees.
• Short or limited track records: Newer private strategies—such as private mortgages and direct lending—may have small sample sizes and shorter histories, complicating due diligence.
• Restrictions for registered accounts: Some private company shares or partnership interests cannot be held inside registered retirement accounts like RRSPs.
• Higher fees: Private asset managers often charge meaningful management and performance fees. Hedge funds and traditional private funds are known for fee structures like “2 and 20” (2% management and 20% performance). Even liquid alternative funds can charge materially higher management and performance fees than passive ETFs and index funds.

How can retail investors buy private investments?

Direct investment in traditional private funds usually still requires accredited investor status in many jurisdictions. In Canada, accreditation commonly means $1 million in financial assets, $5 million in net worth, or $200,000 in annual income ($300,000 for couples) over the past two years. That said, there are more accessible paths for non-accredited investors:

• Some wealth managers and private firms offer open-ended, evergreen funds with limited liquidity and lower account minimums. Certain robo-advisors and private-portfolio solutions can include private funds with modest minimums—for example, platforms that permit minimum investments as low as $1,000 into managed private portfolios.
• Newer retail-focused offerings from fintech and online investment platforms let investors buy into private equity funds or pre-IPO shares with lower minimums. Some providers require minimums in the low thousands or $10,000 for specific private equity programs, along with modest asset requirements.
• Fund companies and mutual fund families have launched liquid alternative mutual funds and ETFs that use private-like strategies—leverage, long/short positions or alternative credit—making certain private exposures available through regular brokerage accounts.

What are some alternatives to private investments?

If you want some of the diversification benefits of private assets without direct exposure, consider these alternatives:

• Listed companies that own private assets: Several public companies and listed asset managers hold large private asset portfolios. Investing in those stocks or in ETFs that track such firms can offer indirect exposure to private market economics while retaining public-market liquidity.
• Other uncorrelated assets: Commodities, real estate and certain digital assets can reduce portfolio correlation with stocks and bonds. Real estate exposure can be achieved through direct property ownership, real estate investment trusts, or fractional real-estate platforms that lower minimums. Precious-metal ETFs provide another low-friction option for diversification.

Should I invest in private investments?

Retail access to private markets has expanded, but greater access does not automatically mean you should invest. For many investors, a diversified mix of public equities and bonds remains appropriate and can deliver strong long-term results. Private investments make sense for investors who understand the long holding periods, fee structures and liquidity limits, and who can afford to lock up capital.

If you decide to pursue private assets, follow these practical guidelines: research the strategy and manager thoroughly; understand every fee and how it will affect net returns; avoid investments you do not fully understand; and ensure you have an exit plan and an allocation size that fits your overall financial goals and liquidity needs.

More about investing:

• Is VFV a good buy? What about other U.S. ETFs with even lower fees?
• Bonds vs. GICs: Where should you invest your fixed-income dollars?
• Canadian bank earnings reports
• Fractional trading puts pricey stocks within reach of new and younger investors
• Top 25 timeless personal finance books