The Allure and Challenges of Private Equity for Ordinary Investors

In recent years, ordinary investors have flocked to park their money with some of the largest private equity firms in the world, drawn by the promise of high returns and exclusive investment opportunities. However, while gaining entry might seem straightforward, exiting these investments could prove to be a daunting task.

Private equity firms like Blackstone, Starwood Capital Group, and KKR have increasingly turned their attention to smaller investors over the past decade. This marked a significant shift for these firms, which had traditionally relied on massive funding from pension funds, endowments, and sovereign wealth funds. This strategic pivot not only allowed these fund managers to expand their asset pools but also enabled them to rake in substantial fees.

For individual investors, the opportunity to invest alongside Wall Street’s elite was irresistible. Wealth managers guided these investors towards new private funds, which opened the doors to a world previously reserved for the ultra-wealthy. However, these investments came with stipulations, including strict withdrawal limits that could complicate access to funds during economic downturns.

The appeal of private equity was bolstered by impressive track records, particularly during the tumultuous times of the 2008 financial crisis. One investment vehicle that particularly captured the public’s interest was private real estate investment trusts, or REITs. These trusts own commercial or industrial properties and offer attractive dividends derived from the rental income they generate.

• Since 2017, when Blackstone launched one of the first REITs backed by a private equity firm, these private REITs have raised over $110 billion from investors through June, making them one of the most sought-after alternative investments.
• During a period of near-zero interest rates, these REITs were especially appealing, offering dividends of approximately 4 percent or more of their assets.

However, the attractiveness of these investments began to wane starting in 2022, as the Federal Reserve rapidly increased interest rates. With even the least risky bond investments now yielding close to 4 percent, the appeal of REITs diminished. Additionally, the rising interest rates have adversely impacted the commercial property market, further complicating the landscape for many REITs.