Why Private Equity and Private Credit Are the Biggest Risk in Markets Right Now

One of the more common questions I get from clients is whether they should put part of their portfolio into private markets. It makes sense why they ask. This asset class has exploded, from roughly $3 to $4 trillion a decade ago to around $22 trillion today, and everyone from Harvard's endowment to your buddy on the first tee seems to own some. My honest take? Right now, I think it's one of the biggest risks in the market. Here's why.

You are paying more for less

The pitch is diversification, high returns, and sophistication. The reality is that investors are paying a premium for less liquidity and even less transparency. And the sophistication part is oversold. Most of these funds go out and buy privately held businesses with investors' money, plain and simple.

The transparency problem

A lot of these assets are only marked to market once a quarter, and they are often priced by the manager itself or by a firm the manager pays to price them. Imagine owning a stock and not knowing what it is actually worth for three months at a time. On top of that, most funds cap how much you can pull out, sometimes only 5% per quarter. They will tell you that protects you from panic selling. It also happens to keep your money locked up and their asset prices propped up.

Why it worries me right now

Since 2021, the number of companies sold in private equity has been cut roughly in half. McKinsey has called it the largest exit backlog in two decades, with trillions of dollars in assets that managers want to sell but cannot find buyers for at the prices they are asking. Prices will not properly adjust until those assets actually trade hands, and until then, valuations can stay artificially high. That is the risk hiding in plain sight.