Private Equity Isn’t the Goldmine You Think It Is

Private equity has an aura of exclusivity. It’s often marketed as where the real money is made—away from the public markets, behind closed doors, where the wealthy get even wealthier. But once you look past the polished pitch decks and glossy brochures, a different story starts to emerge.

Is private equity overrated? In many ways, yes.

While it can generate high returns, private equity also comes with a unique set of risks: illiquidity, high fees, limited transparency, and access that's typically restricted to ultra-wealthy investors or institutions. For many investors, it's a complex and expensive bet that doesn't always deliver as promised.

Let’s unpack what private equity really is, how it works, and why its golden reputation deserves a more skeptical look.

Key Takeaways

Private equity can offer strong returns—but they come with high risk and limited access.
Fees are often layered and much higher than public market alternatives.
Performance data is hard to verify and often selectively reported.
Illiquidity means your money could be locked up for 7–10 years or more.

What Is Private Equity?

Private equity (PE) refers to investments made in private companies (i.e., not traded on public exchanges). These investments are typically made through limited partnerships, where general partners (GPs) manage the fund and limited partners (LPs) contribute the capital.

PE firms often:

Acquire companies outright
Restructure and improve operations
Aim to sell or take the company public for a profit

On paper, this sounds great—buy low, improve, sell high. But it’s rarely that simple.

The Fee Structure: A Big Slice of the Pie

One of the many overlooked downsides of private equity is the fee structure. The standard “2 and 20” model means:

2% annual management fee on committed capital (not just invested capital)
20% performance fee on profits above a certain hurdle rate

Hypothetical Example: If you commit $1 million, you might pay $20,000 annually in fees—even if your capital hasn’t been fully deployed. If your investment grows to $2 million, the GP could take $200,000 of your gains off the top.

That’s before any taxes.

Compare that to index funds charging 0.03% annually (though obviously with a different risk/reward profile).

The Illiquidity Problem

Private equity is not like trading stocks. Typically:

You can’t pull your money out whenever you want.
Lock-up periods typically range from 8 to 12 years.
You may not see meaningful returns until the end of the fund’s life.

This illiquidity might not be a deal-breaker if you’re ultra-wealthy and don’t need access to that capital—but for many investors, it’s a major constraint.

Transparency: Or Lack Thereof

Unlike public markets, where companies must file quarterly earnings and financial disclosures, private equity operates behind closed doors.

You may not know what assets the fund holds.
Valuations are often estimated rather than market-priced.
Reporting standards vary widely between firms.

This makes it harder to assess risk, performance, and real-time exposure—especially during market downturns.

Do the Returns Justify the Risk?

Historically, some private equity funds have outperformed public markets. But it’s important to remember:

The top quartile of PE funds often skews the average.
Many funds underperform net of fees.
Survivorship bias is a serious issue: poor-performing funds have been known to quietly disappear from performance databases.

According to a 2020 study by Bain & Company: The median PE fund launched between 2006 and 2015 returned roughly 15% net of fees—only slightly higher than public markets during the same period, with far more risk and far less liquidity.

Who Usually Wins? (takes less risk)

General Partners (GPs)

They earn fees regardless of performance and profit handsomely when deals go well.

Institutional Investors

Pension funds and endowments with long time horizons and massive capital can afford the illiquidity and often negotiate better terms.

Who Usually Loses? (takes more risk)

Individual Investors

Often get access through feeder funds with higher fees, lower transparency, and worse liquidity terms. Many end up paying more for less.

When Private Equity Might Make Sense

You already have a well-diversified portfolio of liquid assets.
You’re accredited and can commit capital for a decade or more.
You have access to top-tier PE firms (not just what’s marketed to individuals).
You’re comfortable with high risk and minimal transparency.

Private Equity FAQs

Why can private equity performance averages appear overstated?

Survivorship bias occurs when underperforming funds are excluded from databases, leaving stronger funds to dominate reported results.

Who generally benefits the most from private equity’s fee structure?

General partners, who earn annual management fees regardless of results and receive performance fees when profits are realized.

Why might institutional investors be better positioned for private equity?

Large pensions and endowments can accept illiquidity, invest at scale, and often negotiate more favorable terms than individual investors.

What risks do individuals face when investing through feeder funds?

They may pay higher fees, face stricter liquidity limits, and receive less transparent reporting compared with larger institutions.

How do private equity fees compare with low-cost index funds?

Index funds often charge around 0.03% annually, while private equity fees are significantly higher, though the risk-return characteristics differ.

Why is liquidity risk a central consideration in private equity?

Investors typically cannot withdraw funds freely, and distributions are often delayed until portfolio companies are sold or listed.

What strategies do private equity firms often pursue with acquired companies?

They may restructure operations, reduce costs, and seek to sell or take companies public at higher valuations.

How does leverage influence private equity outcomes?

Using debt financing can increase returns when deals perform well but also magnifies losses if performance weakens.

Under what conditions might private equity align with an investor’s strategy?

When the investor already has a diversified liquid portfolio, meets accreditation standards, can commit capital for a decade, and gains access to established firms.

Why is private equity often associated with exclusivity?

Participation is usually limited to accredited or institutional investors, reinforcing its reputation as an asset class with restricted access.