The Problem with Private Markets

0:00 After many years of hiding behind mystique and ili liquidity,

0:03 private markets are being forced into the light.

0:05 Private equity, private credit,

0:07 and private real estate have been sold hard to investors

0:10 on the premise that they offer higher returns with less risk.

0:13 As fund managers push for these investments

0:15 to become more accessible to retail investors, I think caution is warranted.

0:20 I've always been skeptical of private assets,

0:23 and I think my skepticism is being validated.

0:26 2026 has been a wake-up call for everyone

0:28 who was convinced that private assets were special.

0:31 I'm Ben Felix, chief investment officer at PWL Capital,

0:34 and I'm going to tell you why what

0:35 we're seeing in private markets should not surprise anyone.

0:43 Private markets are having an objectively bad time right now.

0:46 Some private equity funds are having trouble selling their holdings,

0:49 often resorting to selling private company shares to themselves.

0:52 We'll we'll get into that.

0:54 Some private real estate funds can't sell

0:56 their underlying real estate assets to meet

0:58 investors demands for liquidity and are having to gate or lock up their funds.

1:02 And private credit funds, many of which are also gating redemptions,

1:05 are realizing that a lot of the loans they've

1:07 made might have been a little on the risky side.

1:10 I'm not really surprised to see any of this, but I

1:12 think a lot of investors in private market funds will be.

1:15 Again, fund managers have pushed private market

1:18 investments relentlessly on the premise that they

1:20 offer lower volatility and higher expected returns

1:23 than what can be found in public markets.

1:26 A compelling sales pitch for sure, but it doesn't smell right, and it never did.

1:31 In this video, I'm going to discuss each of the major private asset classes,

1:34 private equity, private credit, and private real estate.

1:37 I'll review what the evidence says and what

1:39 is happening in each asset class right now.

1:42 But first, a little context.

1:43 Private assets are simply assets like stocks, loans made to companies,

1:48 infrastructure assets, which I'm not going to talk about, and real estate.

1:52 And they're assets that have not been listed on a public exchange.

1:55 This means you can't log into your brokerage account and trade

1:58 private assets like you can trade stocks or REITs or whatever.

2:02 It also means that the underlying

2:04 company's disclosure requirements are not as strict.

2:06 Since they don't trade on public exchanges,

2:08 the prices of private assets are not being set throughout

2:11 the day like what we see with publicly listed stocks,

2:14 bonds, and REITs, making them appear, the private assets appear less volatile.

2:19 Appear is the key word there.

2:21 For decades, private market investments were largely

2:24 contained within the realm of institutional investors.

2:26 Entities like university endowments, pension funds, and not for-profit reserves,

2:30 entities with a lot of capital,

2:32 extremely long time horizons, and professional staff.

2:35 I would argue with supporting evidence of course that private

2:39 markets are even questionable for those types of investors.

2:42 But more recently, private assets have been increasingly pushed

2:44 onto retail investors whether they're asking for them or not.

2:48 In my day job as the CIO of a Canadian wealth management firm,

2:51 I see these sales pitches all the time and they're only increasing.

2:55 The Ontario Securities Market regulator is

2:57 being pressured to authorize a new class of mutual funds that can hold higher

3:00 risk private assets aimed at retail investors.

3:03 Similar things are happening in the US

3:04 targeting the retirement accounts of American families.

3:07 Even if you could convince me, and I don't think you can,

3:10 but even if you could convince me

3:12 that institutions should be investing in private assets,

3:15 the case for retail investors is a lot harder to make.

3:18 The underlying assets are illquid, the fees are high,

3:22 and the agreements governing fees and liquidity are complex.

3:27 There is, however, huge incentive to convince retail investors otherwise.

3:31 Retail investors in aggregate have a lot of money and the high fees charged

3:35 by private market fund managers make them

3:37 very attractive for the financial institutions selling them.

3:41 This is especially true in a world where investors are

3:43 increasingly adopting lowcost index funds for their public market investments,

3:47 driving down profit margins for financial firms.

3:50 Retail investors are also a huge source of potential liquidity

3:53 for anyone currently invested in private markets who wants to get out.

3:57 Liquidity has been a huge problem for private markets lately,

4:00 but we'll get more into that later.

4:02 This leads to the potential for adverse selection

4:05 where retail investors are showing up to the party

4:07 a bit late and they're the ones getting settled

4:09 with the illquid stuff that nobody else wants to buy.

4:12 While the debate about retail access to private markets continues,

4:15 current investors in these funds have been forced to learn

4:17 that their private market investments are in fact quite risky.

4:21 We've seen private funds write down the value of their assets and we've

4:24 seen them tell investors they can't have their money back right now.

4:28 We've even seen some of the biggest

4:29 historical proponents of private market investing,

4:31 Ivy League educational endowments, start to dial back their exposure and lower

4:36 their expected returns for their private market allocations.

4:39 Some large wealth management firms

4:40 have been aggressively promoting their private

4:43 market funds while criticizing the traditional 60/40 stock bond portfolio.

4:47 They performed well for a while while public markets were volatile,

4:50 but now those same firms are facing serious problems.

4:54 They've had to write down the value of some

4:55 of their private funds by huge amounts and they've had

4:58 to tell investors that they can't access their own money

5:01 right now because the underlying assets are too illquid to sell.

5:05 Classic problem of private markets.

5:07 This speaks to one of the inherent trade-offs with private assets.

5:11 You do get less reported volatility.

5:14 Awesome.

5:15 because the underlying assets are valued infrequently.

5:18 Not so great.

5:19 But you might be denied access to your money if the private fund does not want

5:23 to be forced to sell its underlying illquid

5:25 assets when you need access to your money.

5:28 Not great.

5:29 In public markets, you can pretty easily sell at any time,

5:32 but you're subject to market prices when you sell.

5:35 It's an interesting question whether it's worse to live with volatility

5:38 but always have access to your money even if your investment has

5:41 declined in value or to be artificially shielded from volatility while

5:45 potentially being denied the option to sell your investments at a loss.

5:50 I don't have the universal answer, but I would generally prefer liquidity

5:54 and knowing what my investments are actually worth.

5:57 Private assets started gaining popularity following the 2008 financial crisis,

6:00 likely at least in part in response to the traumatic

6:03 levels of volatility in publicly listed assets over that period

6:06 and the need for investors to find ways to recover

6:09 from the losses they sustained in that market decline.

6:12 Private markets were sold as a less volatile

6:14 place to invest while earning potentially higher returns.

6:17 That alone, that combination of hey,

6:20 you can take less risk and earn higher returns should be a major red flag.

6:23 People really want to believe that they are not

6:26 subject to the economics of risk and expected return.

6:29 They want to believe that they can find something special.

6:32 Another big selling point for private assets has always been Yale's endowment.

6:36 Yale had pioneered this strategy and had earned years of famously high

6:40 returns in private markets with the legendary late David Swenson at the helm.

6:44 Other investors have wanted to emulate that outcome ever since.

6:48 Yale certainly did perform well,

6:50 but recent analysis has suggested that their famed

6:52 30% annualized returns that a lot of people

6:55 used as the backbone for the argument

6:57 to go into private markets were not really returns.

6:59 There were something called irr, which can be very misleading.

7:03 My view has always been that net of fees and properly benchmarked.

7:07 There's nothing special in private markets.

7:09 I think this only gets more true in the realm of retail

7:12 investors who generally pay even

7:13 higher fees than their institutional counterparts.

7:17 This point can be contentious and I do

7:19 acknowledge that there's a lot of room for nuance.

7:22 There are some good private market funds at least after the fact.

7:25 We can find ones that did perform well just like there

7:27 are some good traditional actively managed mutual funds after the fact.

7:31 Identifying them ahead of time is not so easy,

7:34 but there are ones that have outperformed

7:35 and there are ones that will outperform.

7:37 But on balance, when you look at the data,

7:39 I'm not convinced that the sales pitch

7:41 matches the economic reality for private assets.

7:44 Before we dive deeper,

7:46 if you haven't already subscribed to this channel, please do.

7:48 I make evidence-based videos on investing and financial decision-making,

7:52 helping you make more informed financial decisions.

7:54 Okay, let's look at each asset class individually.

7:57 There's some wild stuff happening in each one.

7:59 Private equity invests in private companies, attempts to increase their value,

8:03 and then exit the investment at a profit.

8:05 Private equity has multiple underlying strategies

8:07 with the two largest being buyouts and venture capital.

8:10 Buyouts, the largest segment by assets, are where firms acquire a stake

8:14 in a larger and more established private company, often using a lot of debt.

8:18 Venture capital invests in early stage high

8:20 growth companies with the expectation that a small

8:22 percentage of those companies will be

8:24 massively successful while many will lose money.

8:27 The private equity industry's value proposition for investors

8:30 rests on two main pillars in my view.

8:32 Diversification and market beating returns.

8:35 These are testable claims.

8:37 I'm not going to recount all the research on this topic right now.

8:40 I've done that in a past video,

8:41 but there are two main takeaways you should know.

8:43 First is that net of fee private equity returns can be largely

8:46 replicated using public stocks selected to match

8:49 the characteristics of private equity holdings.

8:51 Second is that when you adjust private equity returns

8:54 for the fact that private company shares are not valued every day,

8:57 there is a dramatic reduction in any diversification benefit

9:00 that may have been observed with the raw smoothed returns.

9:04 In other words, they're a lot more volatile than they appear.

9:07 This is a concept that has been referred to as volatility laundering.

9:10 Just because you don't see the price change every day like

9:12 you do with public stocks doesn't mean the asset's value isn't fluctuating.

9:16 A private equity fund may look stable on paper while the underlying economic

9:20 risks are exactly the same as or even worse than public market equivalents.

9:24 There's also massive dispersion in private equity fund returns,

9:28 meaning that there is a huge gap between the best and worst funds,

9:31 increasing the penalty for choosing a bad fund.

9:34 While private equity has delivered returns roughly

9:36 in line with risk matched public equity,

9:38 the asset class has made private equity fund managers extremely wealthy.

9:42 This is not an eat the rich type of comment,

9:44 private equity managers have been able to generate massive returns before fees.

9:48 They're clearly skilled at their craft and I have

9:50 no doubt that they are brilliant people running these funds.

9:53 The problem is that as economic theory would predict,

9:56 they are the ones the managers are

9:57 the ones that reap the benefits of their skill,

10:00 not the investors in their funds.

10:02 While the before fee returns of private equity have been huge,

10:05 the net of fee returns have been in line with public markets.

10:08 This is explained by the exceptionally high fees charged by the managers.

10:12 These include both management fees and performance fees and several other

10:16 potential layers of fees that all add up to around 6%.

10:20 The fee problem isn't the only issue plaguing private equity right now.

10:23 The current state of private equity is that a lot of funds

10:25 have been unable to sell a lot of their underlying holdings.

10:28 Not to meet investor redemption requests necessarily,

10:30 but just to turn over the holdings in their portfolio at a normal pace.

10:34 Usually, private equity companies want to sell

10:36 their underlying companies at a sort of 3 to sevenyear cadence to return

10:40 capital to fund investors and make new investments.

10:43 The result has not been falling prices for these unsold companies,

10:46 which is probably what we would see if they were publicly traded,

10:48 but in the rise of more creative ways to get cash into the hands of investors.

10:52 One prominent example is continuation funds.

10:54 A continuation fund is a fund that buys

10:56 portfolio assets from an existing private equity fund,

10:59 often managed by the same manager to give the fund liquidity.

11:02 An increasingly common investor in continuation

11:05 funds are called evergreen funds.

11:07 Evergreen funds are semi-liquid vehicles that promise

11:09 ease of use for investors and give fund

11:12 managers flexible capital which can be used

11:14 to support continuation funds and make other investments.

11:17 Evergreen funds often have lower barriers to entry than a traditional private

11:21 equity fund and they offer more

11:23 liquidity making them accessible to retail investors.

11:26 While they have become an important source of secondary market capital,

11:29 they raise a major concern.

11:30 The fund manager often controls both sides of the deal.

11:33 This makes the accuracy of the secondary market valuations

11:36 a little bit murky and creates conditions for adverse selection.

11:40 I think a reason that investors can

11:42 more easily buy into these evergreen funds is

11:44 that the manager has investments in an existing

11:47 fund nearing maturity that they have not yet sold.

11:50 This creates a structural need for exit

11:52 liquidity to pay off the original investors.

11:54 Private equity funds ideally want to exit their investments

11:57 to an outside buyer after a few years.

11:59 If they instead sell the assets to an evergreen

12:02 fund or continuation fund that they also manage,

12:04 it may indicate that the manager struggled to find an external buyer,

12:08 suggesting that the assets might not be something that you,

12:10 the investor in the evergreen fund, actually want to buy.

12:14 I think that there's a risk that you're buying a lemon

12:16 that the broader market would not have touched at that price.

12:20 This isn't necessarily always the case, but that's the problem.

12:23 You don't know.

12:24 They're not market tested valuations in these transactions.

12:27 Add on top of this risk that net of fees, as I mentioned earlier,

12:30 the average private equity fund performs roughly in line

12:32 with public market equivalents and investors in these evergreen

12:35 vehicles may be taking on significant complexity

12:38 and valuation risk without being properly compensated for it.

12:42 Another way that investors in private

12:44 equity funds have gotten around the difficulties

12:45 in selling their holdings is by selling them at pretty major discounts.

12:49 Say you have invested in a private equity fund, but you need some cash.

12:53 The fund isn't liquid,

12:54 but you can find someone to buy your stakes at a deep discount.

12:58 This comes with its own problem that's emerged known as NAV squeezing.

13:02 We've seen this issue surface recently with universities that hold

13:05 private equity investments in their endowments like Yale and Harvard.

13:08 Universities, Yale in particular, as I mentioned earlier,

13:11 were among the earliest adopters of private equity funds

13:13 as their longtime horizons made them well suited to lock up capital

13:16 in illlquid assets in exchange for what they hoped for and and maybe

13:21 in some some cases generally got uh higher expected returns.

13:24 Even if this strategy was historically effective in a slow market with high

13:28 interest rates and private equity funds

13:29 taking longer than usual to return capital,

13:31 universities have been forced to sell their stakes sooner

13:34 than planned to free up cash and fund their operations.

13:37 This has been true for other investors too.

13:39 To do this, universities like Harvard and Yale

13:41 have been selling parts of their private

13:42 equity portfolios to secondary buyers at discounts

13:46 averaging around 11% at least in this data.

13:49 This discount is a markdown from the position's net asset value or NAV,

13:53 which is what the fund manager is saying that the assets are worth.

13:56 What gets crazy here though is

13:57 that the secondary market buyers can put the purchase

14:01 price on their own books and immediately market back up to the original NAV.

14:06 So, if Harvard sells a $100 million stake

14:08 in a private equity fund at a at an 11% discount, as the average shows,

14:13 the secondary market buyer can purchase that stake for $89 million,

14:17 but then immediately mark it back up to $100

14:19 million because that's still the fund's initial net asset value.

14:22 This is allowed in the accounting rules.

14:25 So, they paid less for it,

14:26 and it's usually a private equity fund that is buying these fund stakes,

14:30 like a fund of funds.

14:31 On paper, the purchase has generated

14:33 an immediate 11% return for the purchasing fund,

14:37 even though nothing about the underlying value

14:39 of the companies or fund stakes has changed.

14:42 This process has become increasingly common with secondary

14:44 market sales increasing 45% to 162 billion last year,

14:48 and it could be seen as a win-win for those involved in the transaction.

14:51 Universities free of some capital,

14:53 often still more than they paid for the initial investment in the fund,

14:56 and the secondary buyer of the fund

14:58 stakes reports a massive return for their fund.

15:01 Recently, some fund managers have even adapted

15:04 their fee structure to capitalize on this.

15:06 Fund manager Hamilton Lane has updated

15:08 their fee structure to collect performance fees

15:10 based on the unrealized gains rather than

15:13 waiting until a company is actually sold, as would usually be the case.

15:16 Hamilton Lane reportedly took in $58 million

15:19 in incentive fees shortly after changing its fee structure,

15:22 which they may not have seen for years, if ever, under the old fee rules.

15:26 Again, if this whole thing smells a little bit fishy,

15:29 I think you've got a good nose.

15:30 Some people have speculated that this change in fee rules is because

15:34 the fund manager themselves may suspect

15:36 that these higher paper valuations may not last.

15:40 And the mere presence of the discount when they

15:42 buy the fund stakes lends some credence to this suspicion.

15:45 It raises the question of whether the fund

15:47 was ever worth the $und00 million to begin with.

15:49 When retail investors are sold and believe the idea

15:52 that private equity funds can actually generate these returns for them,

15:55 that becomes a problem.

15:56 You may hold an investment showing strong

15:58 official paper returns on your monthly statements,

16:02 but when you actually need liquidity,

16:04 you discover that you're either unable to access your funds

16:06 or that you need to sell your fund stakes at a deep discount.

16:10 Another current concern is the private equity

16:12 industry's heavy exposure to software companies where

16:14 private equity has concentrated a huge portion

16:16 of its deals over the past decade.

16:18 The private equity playbook of borrowing a bunch of money

16:20 to buy a successful SAS business and then improving it

16:23 a bit for an exit a few years later works when

16:26 the economy is good and the demand for software is high.

16:28 But it kind of falls apart when corporate spending is strained

16:32 and something like AI threatens to disrupt the SAS revenue model altogether.

16:36 This exposure is now affecting other parts of the private market because

16:40 who's private equity borrowing from to get leverage for these software buyouts?

16:45 In many cases, private credit.

16:46 Private credit consists of loans to private companies,

16:49 kind of like bonds, except the loans are not publicly traded,

16:52 and they're created by non-bank entities like private

16:55 credit funds or business development companies, BDC's for short.

16:59 We're going to talk more about them in a minute.

17:01 These funds raise money from investors and make direct loans,

17:04 often with flexible terms and covenants, to private companies.

17:08 These loans, by their nature, by being loans to private companies, are risky.

17:13 Like private equity,

17:14 private credit funds will not have their assets marked to market daily.

17:17 This allows them to appear low risk even if the value of their underlying

17:21 assets of the underlying loans would

17:23 be fluctuating wildly in the public markets.

17:25 And there's an interesting way where we

17:27 can see that that's actually what's happening.

17:29 And I'll talk about that in a sec.

17:30 Similar to private equity, when the returns on private credit funds

17:33 are properly evaluated against risk appropriate benchmarks,

17:37 I don't think there's anything special there.

17:38 One important point is that similar to publicly traded high yield bonds,

17:42 private loans often share return characteristics with riskier stocks.

17:46 While private credit has seen enormous growth,

17:48 the assasses recently started to see investors wanting their money back.

17:52 But due to the illquidity in the underlying loans,

17:54 some private credit funds have had to gate redemptions.

17:58 Think about this as an investor.

17:59 You put your money in a private credit fund

18:01 to try to get some nice juicy yield which

18:04 was marketed to you super hard in whatever app

18:06 you're using or whatever financial adviser you were talking to.

18:09 You start to feel a little bit uneasy for whatever reason

18:11 about the underlying assets or about the economy, about your job.

18:14 So, you ask for your money back.

18:16 The problem is that people usually start to feel

18:18 uneasy about those things around the same time.

18:21 So, while everyone wants their money back,

18:22 the private credit fund has to say no.

18:25 Now, to be clear, this is not private credit funds being evil.

18:28 This is a feature, not a bug.

18:31 At least if you are the private credit fund.

18:33 Private loans are typically long-term loans that are

18:36 not expected to be or designed to be liquid.

18:39 Investors in these funds should understand that going

18:42 in, but I think that's easier said than done,

18:44 especially in retail, as we have seen recently.

18:48 In some cases, gated funds can be locked up for years.

18:51 Publicly listed BDC's on the other hand offer

18:54 a fascinating contrast to unlisted BDC's or private credit funds.

18:59 Rather than gating they feel the full force

19:02 of the market's assessment of the value of their underlying loans.

19:06 Take the FS KKKR Capital Corporation as one example.

19:10 It reported an increase in troubled loans

19:12 and lower investment income and the market responded swiftly.

19:16 Again, this is publicly traded.

19:17 The fund is down significantly for the 12 months ending February 27th.

19:22 Another BDC, Midcap Financial Investment Corp,

19:24 has similarly marked down some of its loans and been

19:27 recognized by the public market for their honesty about their disclosures.

19:31 Again, with the price of that BDC dropping significantly.

19:35 If nothing else, that should indicate how much risk private credit funds,

19:38 unlisted private credit funds, where you don't get to see

19:40 the the value valuations fluctuating in the public market,

19:43 it should really indicate how much risk they're actually taking.

19:46 Again, these are very similar things.

19:48 One's publicly listed, one's not.

19:50 When you have risky underlying assets,

19:52 you're either going to get volatility or if you say,

19:56 "I don't want to see the volatility, so I'm going to get uh invest in a private

19:59 fund," then you're going to get ili liquidity.

20:00 When public markets get volatile,

20:02 one of the problems with ili liquidity is that you

20:05 have to own assets that you know kind of stink.

20:07 Once the fund manager says, "No,

20:09 you can't have your your money back." That's usually

20:11 at a time when the underlying are stressed, are struggling,

20:14 which is why they can't be sold and you have to then

20:17 continue to pay fees on those stinky assets to to own them.

20:21 Well, well, you're not able to sell.

20:22 The other crazy thing that's happening in private credit where firms

20:25 are getting increasingly creative for ways to come up with with cash

20:28 with liquidity for the underlying funds uh is they're turning to some

20:32 pretty interesting shenanigans with insurance companies

20:35 uh to to meet their liquidity needs.

20:37 So, life insurance companies have traditionally kept their massive cash

20:40 reserves in stable conservative investments like whatever stocks and bonds,

20:45 things like that, diversified portfolios.

20:48 They're they're kind of the classic uh conservative institutional investor.

20:52 Private equity firms are now buying insurance companies,

20:55 moving significant portions of their portfolio into private

20:58 credit for its higher yield insurance companies.

21:01 So they they take in insurance premiums.

21:04 They have to be able to pay out uh the death benefit

21:06 or the disability benefit or whatever when someone dies or becomes disabled.

21:10 But in the interimm they can invest those the the excess

21:13 premiums that they don't need to to run the business

21:16 and they get to keep the difference between what they earn

21:19 on their investments and what they pay out to policy holders.

21:21 That's a simplification but it's it's basically like that.

21:25 So the the recent playbook that has emerged is that private equity buys

21:29 an insurance company and then instead

21:31 of maintaining the typically conservative investment portfolio,

21:34 they stuff its portfolio with private credit

21:37 funds often from lenders that are owned

21:39 by the same private equity firm that owns the that now owns the insure.

21:43 Kind of crazy.

21:44 And this process is creating a closed loop of risk

21:47 with hopefully obvious potential repercussions if the private loans go sour.

21:52 The issues rattling private equity and private

21:53 credit are becoming increasingly clear to the market.

21:56 Major publicly listed players in these asset classes,

21:59 that is publicly listed companies who sell and manage private

22:02 equity and private credit funds have seen their share prices

22:05 get obliterated in recent history as the underlying risks in what

22:09 they have been selling are increasingly pushed into the light.

22:12 The last asset I'll cover is private real estate.

22:13 Private real estate funds directly own

22:15 real estate assets like apartment buildings, office towers, and shopping malls.

22:18 They can have various strategies,

22:20 but the general idea of owning real buildings inside

22:22 of a private fund is consistent across this asset class.

22:26 They're often not unlike a publicly traded REIT,

22:29 except that the private funds don't trade on the stock market,

22:31 similar to what we talked about with private equity and private credit.

22:34 Also, like private equity and private credit,

22:36 some private real estate funds in Canada have struggled with liquidity.

22:39 This is not super surprising.

22:41 The Canadian real estate market has experienced its

22:43 worst real price decline going back to 1975.

22:46 Public residential REITs have taken a beating.

22:49 And private fund managers understandably don't want to be

22:52 forced to sell assets that have declined in price.

22:55 That's fine, and it's why their contracts

22:57 with their investors allow them to gate

22:59 their funds when too many people are asking for liquidity at the same time.

23:03 In the midst of the liquidity crunch

23:05 for many private Canadian real estate funds,

23:06 some are considering going public as a source of liquidity.

23:09 Being public means that investors can buy and sell their shares

23:12 on the open market without the fund needing to sell its underlying assets.

23:15 but it also exposes the value of the fund's units to market prices.

23:19 While these funds consider going public,

23:21 they've halted redemptions for current investors.

23:24 I can't tell you what will happen with these IPOs,

23:27 but I can tell you what happened in similar situations in the US.

23:30 In November of last year, FS Specialty Lending Fund listed on the New York Stock

23:35 Exchange at a net asset value of $18.67 a share.

23:39 On the end of its first day on the market, it closed at $14.

23:42 In December, Blue Rock's Total Income Plus Real Estate Fund began trading

23:46 on the New York Stock Exchange with a stated NAV of $24.36 a share.

23:52 At close, the fund was trading at a market price of $14.70 a share,

23:57 nearly a 40% draw down from the beginning of the day.

24:00 It's kind of funny that funny is not the right

24:01 word because there are real investors who are in difficult

24:04 situations because of this, but these funds are sold

24:08 as protection against stock market or or public market volatility.

24:12 But they often take huge hits once they themselves

24:14 are exposed to genuine price discovery in the market.

24:18 The risk was still there.

24:19 They just weren't telling you about it or showing it to you.

24:22 An important question then in private real estate is whether private real estate

24:26 funds are adding anything special that cannot be found in a liquid public REIT.

24:31 A 2018 paper finds that public REITs behave a lot

24:34 like a portfolio of 60% small value stocks and 40%

24:38 long-term high yield bonds and that private REITs behave almost

24:41 exactly the same way when a valuation lag is accounted for.

24:45 In other words, the stock and bond factors that explain

24:48 public REIT returns also fully explain private real estate returns.

24:51 A 2019 paper similarly finds that when adjusted for the different

24:54 leverage and sector composition of public and private real estate indices,

24:58 there's no special return premium in private real estate.

25:01 Again, this does not mean that there are no good private real estate funds.

25:05 I'm sure they're out there.

25:06 Private markets have been sold to investors

25:08 as a way to increase their expected returns without

25:10 increasing and maybe even decreasing the amount

25:12 of risk they are taking relative to public markets.

25:15 Recent red flags in private equity, credit,

25:17 and real estate have shown that these assets are at least as risky

25:21 as their public counterparts and may be hiding

25:23 additional layers of risk due to high fees,

25:26 illliquidity, and less scrutiny in how assets are valued.

25:30 I'm glad that my firm did not jump head first

25:32 into the space when it started getting pushed hard into retail channels,

25:35 and I hope retail investors will approach

25:37 these assets carefully as they continue to be promoted.

25:40 If you want to know more about PWL's

25:42 super boring investing philosophy, you can click here.

25:45 Or if you'd like to learn about

25:47 the research on private equity, you can click here.

25:49 Stay safe out there.