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Private Equity was once the exclusive province of the ultra-wealthy and large pension funds and endowments.

This once highly sought after investment opportunity--exclusive and lucrative private investments like Facebook , Spacex, and Anduril, the cutting edge defense contractor--was reserved for large institutional investors and wealthy family offices.. These investments generated outsized returns for the chosen few large investors and huge fees for the Private Equity firms and the brokerages who sold them.

Now, as private equity investments have soured and the “smart money” has pulled out, private equity firms have repackaged and dumped their beaten up leftovers on the retail investor, a/k/a, the “Dumb Money.”

To make the investments salable to retail investors, the big PE players—Apollo, Blackrock and KKR—have repackaged private equity investments in new investment vehicles such as Exchange Traded Funds ( ETFs ) and “Interval Funds”, which allow investors to exit only at certain quarterly intervals.

The repackaged funds contain “leftovers” from funds institutional investors wanted to get rid of or bad deals that can’t easily be sold on a stand-alone basis.

According to a recent Wall Street Journal article, Moody’s Ratings sounded the alarm on the sale of private funds to individual investors. Link here. 

Moody’s warned that retail investors are prone to sell out during market downturns and face large losses due to the illiquidity of private investments and the “interconnectedness” of large private fund managers who are all in the same deals.

The risks inherent in private investments are not well spelled out in the repackaged fund offering documents nor do stockbrokers do a good job of explaining the risks of high fee products they push on their retail customers.

So what should the “Dumb Money” do before investing in some fancy sounding new private fund ? Its best to contact an investment fraud attorney or securities arbitration attorney to discuss the risks or recovery of investment losses.

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