Opinion: Caution: Private investments ahead

Jason Flores

The search for the latest and greatest way to make money never takes a break. Recently, investors chased cryptocurrency, SPACs, meme stocks and NFTs such as Bored Ape art.

A little further back, the hot investments were CLOs, CDOs, IPOs and anything dot-com.

A long time ago, tulip bulbs were all the rage.

Almost anything can be a hot investment. For my mom it was Beanie Babies, NeeDoh Cubes for my wife, and for me it was late ’80s baseball cards. Usually, these things don’t end well. Anyone want some ’87 Topps Jose Canseco cards for a good – or actually – any price?

Private markets have been the latest to capture investor attention. To keep it simple, private market investments are typically equity in or loans to a private business or project. The list of investments is long. Examples include providing loans to schools for infrastructure or real estate projects, and equity in dental practices, sports teams, music catalogs or space companies.

Investing in and loaning to private businesses is as old as business itself. But the popularity of private investing has exploded. What once was only available to qualified investors and institutions has been “democratized” by new funding structures and regulations, allowing investors unprecedented access. 

A few years ago, private investments might lock up investor capital for five to 10 years. Now, semiliquid structures offer the promise of liquidity. Previously, no one really knew the value of their investment; now frequent valuations provide comfort.

But investors do need to take caution. Private investments may not be as great as advertised.

The fees for private funds are high. Management fees range between 1%-3% per year. Additionally, incentive fees can reach as high as 25%. Fees and taxes are the biggest drag on returns.

That new structure allowing investors to sell (called redeeming) more frequently? Investors are usually limited to redeeming once per quarter. The amount that can be redeemed is typically limited to 5% of the value of the fund. For example, a $1 billion fund will redeem $50 million a quarter from investors. If investors collectively ask for more than 5%, then the fund’s board decides if they will redeem more or not. Investors may get part, all, or none of what they asked for until the next redemption window opens.

Private markets are under serious redemption pressure this year. The only thing preventing collapse in some private funds is the redemption limitations. An analysis from Business Insider showed redemption requests of $19.5 billion from private credit direct lending funds in Q1 2026, with $10.4 billion paid out. Funds from Blue Owl, KKR, Apollo, Blackstone and Ares had redemption requests greater than their limits as investors try to exit.

More frequent valuations? They are not always market prices. There are a variety of ways to value the underlying assets in a private fund, including the fund manager’s estimated value. Please read that again.

High fees, limited liquidity and opaque valuations are a small price for great investments that will increase in value or cash flow, right? Except investors typically just have clues to what they own. That fund that has equity in sports teams? Investors are unlikely to know which teams and what percentage of the teams the fund owns. 

Questionable practices have gained attention yet are growing such as payment in kind loans allowing borrowers to pay by borrowing more rather than paying cash. Moving marked down assets from an old fund to a new fund, then marking these same assets up to show an immediate gain has gained steam. Private funds investing in other private funds add more layers of fees and less transparency, yet this continues. 

To attract investment, some funds are sharing more information. Private equity funds highlight investments in SpaceX, OpenAI and Anthropic as investors look to capitalize pre-IPO. The price the fund bought these companies at and the other investments in the fund may not be disclosed.

Not all private investments are bad, but buyer beware. One of the most important rules of sound investing is understanding what you are investing in.

After hours of researching Beanie Baby prices, my son was dismayed at his grandmother’s worthless collection. He let me know it only cost him a few hours. In some cases, private market investors may not be so lucky.

Jason Flores is executive vice president and chief investment officer at Central Trust Co. He can be reached at jason.flores@centraltrust.net.