Private Equity and Private Credit: The Private Markets Mirage?

Private markets have long enjoyed a mystique—an image of exclusivity, superior returns, and access to deals the public market investor could only dream of. In recent years, this mystique has been monetised, as capital has flooded into private equity and private credit strategies. According to Preqin (2024), assets under management in private markets surpassed $13 trillion globally, with private equity and private credit accounting for over half of that total.

Yet the crucial question remains: do these complex, illiquid, and often expensive strategies actually deliver for investors?

A Primer on Private Equity

At its core, private equity (PE) refers to investments in companies that are not publicly traded. These may be:

• Start-ups (via venture capital)

• Mature businesses in need of capital for expansion (growth equity)

• Public companies taken private through leveraged buyouts (LBOs)

PE managers raise capital in pooled funds and deploy it over a multi-year period, often restructuring companies operationally or financially before exiting—typically via trade sales, public listings, or secondary buyouts.

Historically, the returns on offer—especially at the top end of the distribution—have been impressive. Data from Harris, Jenkinson, and Kaplan (2014) show that top-quartile private equity funds have outperformed public equity benchmarks gross of fees. This return premium, often referred to as the illiquidity premium, is the theoretical compensation investors receive for locking up their capital for extended periods.

The study analysed over 1,400 private equity funds (primarily US buyout funds) launched between 1984 and 2008.

• Their main metric was Public Market Equivalent (PME), which compares private equity fund performance to public equity benchmarks by simulating the timing of cash flows.

✅ Main Result:

US buyout funds produced a PME of approximately 1.22 relative to the S&P 500, meaning they outperformed by around 22% cumulatively on a time-weighted basis, gross of fees.

• This equates to a gross annualised outperformance of roughly 3–4% per year relative to public equities over the life of the fund.

• Venture capital fund performance was more volatile and less consistently outperforming.

📌 Benchmarks Used:

• The S&P 500 was the primary benchmark.

• They also tested against other indices such as the Russell 2000 and Wilshire 5000, with broadly similar conclusions for buyout funds, although outperformance was somewhat lower for more representative indices of small and mid-cap stocks.

However, not all researchers are convinced by PE. Ilmanen (2022) argues that the illiquidity premium is often overstated or inconsistently realised, noting that investors may underestimate the cost of illiquidity, especially when markets seize up and flexibility matters most.

Beyond questions of investment return, others have raised concerns about the ethics of private equity. Investigative journalist Gretchen Morgenson has highlighted how certain buyout practices—particularly those involving excessive leverage and asset-stripping—can weaken companies, accelerate job losses, and in some cases lead to insolvency. This has sparked wider debate over whether private equity genuinely creates long-term economic value or merely extracts it at the expense of other stakeholders (Morgenson and Rosner 2021).

The Private Credit Boom

Private credit—also referred to as private debt—describes lending activity that occurs outside the traditional banking system. Rather than companies borrowing from banks or issuing publicly traded bonds, they borrow directly from non-bank institutions such as private debt funds, insurance companies, or specialist lenders.

This asset class has expanded rapidly since the 2008 global financial crisis. As regulators tightened capital requirements on banks, traditional lenders pulled back from riskier corporate lending. Into this vacuum stepped private credit funds—agile, less regulated, and hungry for yield.

The private credit universe encompasses a variety of strategies, including:

• Direct Lending: Senior secured loans to mid-sized, often private, companies. This is the most common strategy and often involves floating-rate loans with collateral backing.

• Unitranche Lending: A hybrid structure combining senior and subordinated debt into a single loan, simplifying capital structures for borrowers while offering higher yields to lenders.

• Mezzanine Financing: Subordinated debt with embedded equity-like features, such as warrants or payment-in-kind (PIK) interest, used in growth or buyout scenarios.

• Distressed and Special Situations: Purchasing or restructuring the debt of companies facing financial stress, aiming to generate returns from recovery or takeover.

• Asset-Based Lending: Loans secured by specific collateral (e.g. inventory, commercial property, receivables), often used by companies with irregular cash flows or weak credit profiles.

The appeal of private credit lies in its ability to offer attractive yields—often 300 to 500 basis points above public corporate bonds—alongside custom structuring, covenants, and security. Unlike syndicated loans or public bonds, private credit deals are typically bilateral, negotiated directly between borrower and lender. This bespoke nature gives investors greater control and potentially stronger protections.

But these advantages come with trade-offs:

• Illiquidity: Most private credit investments are locked up for several years and cannot be easily traded.

• Transparency: Disclosure is limited. Investors must rely on fund reports and opaque valuation models.

• Complexity: Documentation, covenants, and default remedies can be difficult to evaluate without specialised expertise.

• Downside Risk: In downturns, default rates can spike. Because these loans aren’t marked-to-market daily, the risks are often underappreciated until losses are realised.

Figure 1. This chart provides an illustrative comparison of yields from 2013 to 2023 across private credit, investment-grade bonds, and high-yield bonds, based on representative market averages. Private credit yields—drawn from sources such as Cliffwater, BlackRock (2023), and McKinsey (2023)—typically ranged from 6% to 9%, reflecting the risk and illiquidity premium of direct lending. Investment-grade bond yields, using benchmarks like the Bloomberg Global Aggregate and ICE BofA indices, generally ranged from 2% to over 4% in recent years. High-yield bonds averaged 5.5% to 8%. Whilst private credit offers a consistent yield premium, it does so with higher complexity, illiquidity, and downside risk. The chart is stylised to illustrate structural differences, not to track exact historical spot rates.

Please see the ‘Chart References’ section at the bottom of this blog post for further information.

The Gross vs Net Return Mirage

It’s easy to be seduced by headline performance. A PE fund delivering a 20% internal rate of return (IRR) sounds like a no-brainer—until you understand how much of that value accrues to the manager, not the investor.

This is where the findings of Berk and van Binsbergen (2015) provide a sobering reality check. Their research suggests that whilst skilled active managers may generate alpha, investors do not capture this alpha in net returns. Why? Because in a competitive capital market, any value created by skill is captured by managers through fees and carried interest. In essence, investors pay for access to skill—often in full.

This economic rent transfer is particularly acute in private markets, where fees remain stubbornly high and transparency is limited. The typical PE fee model is still ‘2 and 20’: a 2% management fee and 20% of the profits, often with complex hurdles and clawbacks (Moonfare 2025). In private credit, management fees of 1% and incentive fees of 10% to 15% are not uncommon (McKinsey 2023).

In practice, gross returns may look attractive, but once fees, expenses, and cash drag are accounted for, net returns often fall to levels barely above public market alternatives.

Manager Selection Risk

Public market investors often face market risk—the risk that asset prices fall. In private markets, investors face a different beast: manager risk.

Private equity and private credit returns are not normally distributed. The spread between the top- and bottom-quartile managers is enormous. For private equity funds launched between 2000 and 2015, the spread in IRR between the 75th and 25th percentile was often more than 10 percentage points (Døskeland and Strömberg 2018).

This means that unless you have privileged access to top-tier managers—often reserved for the largest institutions—the median investor may fare poorly. And due to the long lock-up periods, you may not even know how your investment is performing for years.

Illiquidity, Complexity, and the Myth of Diversification

Much of the appeal of private markets rests on their supposed diversification benefits. After all, these assets are not marked-to-market daily, and their returns appear to be less correlated with traditional equity and bond markets.

But this smoothness is largely an illusion—a function of infrequent pricing, not genuine resilience. When liquidity evaporates and economic stress arrives, private market returns tend to ‘catch up’ with public markets in painful ways. The Global Financial Crisis is a case in point: many PE funds experienced drawdowns similar to public equities, but with a lag (Jenkinson, Sousa, and Stucke 2013).

Private credit, in particular, is often wrongly positioned as a substitute for traditional fixed income. This is a flawed comparison. Gilts and high-quality government bonds exist to provide capital preservation, daily liquidity, and to act as ballast during equity market drawdowns. Private credit, by contrast, is a credit-risky, illiquid, and cyclical asset class—behaving more like equity in disguise during downturns. It is not a direct replacement for investment-grade bonds or sovereign debt.

As such, including private credit in the ‘defensive’ bucket of a portfolio can fundamentally undermine its role in risk management. Yield alone is not a sufficient justification—especially when it comes with the trade-offs of complexity, lack of valuation opacity, and event risk.

Should Individual Investors Even Bother?

Retail investors are increasingly being targeted with ‘semi-liquid’ private market offerings—interval funds, listed PE trusts, or feeder vehicles promising access to the exclusive world of private deals.

But one should ask: why is this access being offered now? Top managers don’t need capital from retail investors. It is usually during periods of lower expected returns—when the smart money is cautious—that mass access is granted.

In this light, many private market funds resemble products built to harvest fees, not to deliver long-term value to investors.

Government Policy Shift: The Mansion House Accord and Pension Fund Allocations

In 2023, the UK government introduced the Mansion House Accord—a voluntary agreement involving 17 of the UK’s largest defined contribution (DC) pension providers, collectively managing over £250 billion. Under the Accord, these providers committed to allocating at least 5% of their default fund assets to unlisted equities, including private equity and venture capital, by 2030 (HM Treasury 2023).

The policy aims to unlock up to £50 billion of capital for UK growth-focused businesses, channelling funds into sectors such as infrastructure, innovation, and early-stage companies. Half of these private equity investments are expected to be UK-based, part of a broader government effort to bolster domestic capital markets and productivity (HM Treasury 2023; Financial Times 2023).

In principle, the government’s ambition to stimulate long-term economic growth is commendable. After all, public borrowing rests on the assumption that a growing economy will generate the revenues needed to service today’s deficits tomorrow. Economic growth not only supports the sustainability of public finances, but is also essential to improving living standards—raising productivity, boosting wages, and expanding the capacity of public services over time (IFS 2024).

However, directing default pension allocations towards complex, high-fee, illiquid assets is, in my opinion, a highly questionable route to achieving it. A more effective approach might involve reducing corporate tax burdens, simplifying regulation, and removing bureaucratic barriers—measures that support investment and business formation more broadly without imposing potential risks on pension savers—ordinary people like you or me!

Critics also point out that the underlying assumption—that private markets will deliver superior returns—remains contested. Given the fee structures, lack of opacity, and manager dispersion within private equity, some trustees worry that such allocations may not serve the best interests of members, especially within default funds designed for the average saver (Financial Times 2023).

Importantly, these changes apply only to default investment strategies. Savers who wish to avoid exposure to private markets can typically switch to alternative investment options within their pension scheme, assuming their provider offers suitable choice and transparency. You can do something about this if you choose to!

Conclusion: Proceed with Eyes Wide Open

Private equity and private credit are not inherently bad. They may offer value to investors who can tolerate illiquidity, evaluate complex strategies, and gain access to top-tier managers. But they are far from a guaranteed upgrade from traditional assets. The government’s Mansion House reforms reflect a desire to boost economic growth by funnelling pension savings into private markets. But mandating illiquid, complex assets in default pensions is a questionable approach.

The evidence suggests that:

• Gross returns may look attractive, but net returns often do not

• Fees and illiquidity impose significant costs on investors

• Access to skilled managers is limited and highly concentrated

• In periods of market stress, private assets are not immune—they are just slower to reprice

• Private credit should not be mistaken for a substitute to gilts or other high-quality bonds

In short, private markets are not a miracle cure for low expected returns. For most investors, the boring but beautiful world of low-cost, globally diversified public markets remains the more robust—and evidence-based—solution.

References

Berk, Jonathan B., and Jules H. van Binsbergen. 2015. ‘Measuring Skill in the Mutual Fund Industry’. Journal of Financial Economics 118 (1): 1–20. https://doi.org/10.1016/j.jfineco.2014.07.002.

BlackRock. 2023. Private Credit: The Opportunity and the Risks. https://www.blackrock.com/institutions/en-gb/solutions/private-credit.

Døskeland, Trond, and Per Strömberg. 2018. ‘Evaluation of Private Equity’. Oxford Review of Economic Policy 34 (3): 532–568. https://doi.org/10.1093/oxrep/gry014.

Financial Times. 2023. ‘Pension Funds Warn of Risks in Mansion House Reforms’. Financial Times, July 12, 2023. https://www.ft.com/content/78dd3a6f-54f7-4a7d-b41f-318aab7ae5a7.

Harris, Robert S., Tim Jenkinson, and Steven N. Kaplan. 2014. ‘Private Equity Performance: What Do We Know?’ Journal of Finance 69 (5): 1851–1882. https://doi.org/10.1111/jofi.12154.

HM Treasury. 2023. Mansion House Reforms: Unlocking Investment in UK Growth. https://www.gov.uk/government/news/pension-schemes-back-british-growth.

IFS (Institute for Fiscal Studies). 2024. “Fiscal Rules and Investment in the Upcoming Budget.” September 27, 2024. https://ifs.org.uk/articles/fiscal-rules-and-investment-upcoming-budget

Ilmanen, Antti. 2022. Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least. Hoboken: Wiley.

Jenkinson, Tim, Ruediger Stucke, and Miguel Sousa. 2013. How Fair Are the Valuations of Private Equity Funds? Saïd Business School Working Paper. https://ssrn.com/abstract=2229547.

McKinsey & Company. 2023. Global Private Markets Review 2023. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights.

Moonfare. 2025. Private Equity Fees: Management & Performance Fees. https://www.moonfare.com/blog/private-equity-fees.

Morgenson, Gretchen, and Joshua Rosner. 2021. These Are the Plunderers: How Private Equity Runs—and Wrecks—America. New York: Simon & Schuster.

Preqin. 2024. The Future of Alternatives 2024. https://www.preqin.com/insights/research/reports.

Chart References

BlackRock. 2023. Private Credit: The Opportunity and the Risks. https://www.blackrock.com

Cliffwater. 2023. Direct Lending Market Overview Q4 2023. https://www.cliffwater.com

McKinsey & Company. 2023. Global Private Markets Review 2023. https://www.mckinsey.com

ICE BofA Indices. 2023. US Corporate and High Yield Bond Index Data. https://indices.theice.com

Bloomberg. 2023. Bloomberg Global Aggregate Bond Index. https://www.bloomberg.com