Will Retail Investors Benefit From Accessing Private Markets?

The SEC has recently proposed widening individual investors' access to private markets, which have historically been closed to retail investors. A working paper by Wharton finance professors Robert Stambaugh and Luke Taylor, co-authored with Lubos Pastor and titled "Democratizing Private Markets: Equilibrium Predictions," examines who gains and who bears the cost of that change. According to the authors, private equity funds hold about $5.7 trillion, roughly 7% of the combined value of U.S. public and private equity, and tend to move with the stock market, so public equities already offer retail investors a reasonable substitute.

In the authors' model, access would barely change retail portfolios, which move almost in lockstep with their pre-access returns (correlation of 0.99). Welfare gains are 0.01% of wealth per year in the short run and 0.07% once private firms expand, and the authors state that fees are not the main driver: even at institutional fee levels, the long-run gain is only 0.14% per year. The gain would become meaningful only if private markets reached about 15% of total value rather than 7%, in which case the long-run gain would rise to 0.55% per year. The authors note their figures may overstate benefits because the model excludes access to weaker funds and difficulty exiting hard-to-value holdings.

The authors find private equity beat the market by about 1% per year after risk adjustment before democratization, but interpret this alpha as compensation to institutions for bearing private-market risk alone. When retail investors share that risk, institutional compensation falls and the alpha drops to about 0.4% per year, which roughly offsets the extra fees retail investors pay. In the short run, institutions lose about 0.11% of wealth per year, though in the long run private markets grow by the amount retail investors contribute and institutions retain their prior dollar holdings and welfare.

The firm-level effects are far larger, according to the authors. Private companies' cost of capital temporarily falls about 0.6% per year, prompting investment until costs return to their starting level; the price effect is temporary but the capital growth is permanent. Across scenarios, private sector capital more than doubles by about $8 trillion while public companies shrink 8%, or about $5.9 trillion, as private firms crowd them out, leaving a net increase of $2.1 trillion in total economic capital. The authors suggest this could allow firms to remain private longer, which could weaken the case for the transparency that accompanies public listing. They also predict democratization will more than double the size of the private equity industry.