In today’s ever-evolving investment landscape, private equity and venture capital have become buzzwords among ambitious investors. The allure is understandable: top-performing funds often report double-digit annual returns, some even boasting performance that far outpaces traditional mutual funds or index strategies. For those tired of the public markets and their perceived constraints, the private market seems to offer a world of higher returns, exclusivity, and access to the next big thing before it goes public. But beneath the glamour lies a set of risks and realities that every investor—especially newcomers—needs to consider carefully.
One of the first things that stands out when you compare private funds to public investment vehicles is the vast difference in return dispersion. While mutual funds tend to have modest variation between the best and worst performers over a decade, private equity and venture capital funds show a far greater spread. According to data from PitchBook, the internal rate of return (IRR) between the top 25% and bottom 25% of private equity, venture capital, and private real estate funds frequently exceeds 10 percentage points annually. This isn’t a small detail—it’s a fundamental characteristic of private markets that changes the entire nature of investing within them.
The reasons behind this disparity are structural. Private funds are built for the long haul. Unlike open-end mutual funds that can be created or dissolved based on investor demand and fund performance, private funds typically lock in investor capital for a fixed term of around 10 years. Once capital is committed, it’s gradually called by the fund manager over time, invested into portfolio companies, and ultimately returned—if all goes well—upon successful exits. But if a fund underperforms, it cannot simply shut down and quietly disappear. It must still manage its assets to completion, often over a decade, which means those poor results linger in the benchmarks.
In contrast, mutual funds that fail to attract sufficient assets or consistently underperform tend to close early. This creates a survivorship bias in the public markets that makes long-term averages look cleaner and more compressed. Private funds don’t have that luxury. Once they’re launched, they’re committed, and the returns—whether good or bad—stick around for years. As a result, private fund performance data tends to show broader variation, not just because of differences in manager skill but also because the weak performers are still fully counted in the numbers.
This wide performance spread can be both a temptation and a trap. It’s tempting because it suggests that if you can pick the right manager, the payoff could be huge. But it’s also a trap because getting it wrong isn’t just a matter of missing out on gains—it can mean tying up your capital for years in a fund that may significantly underperform. There’s no way to back out easily. Once you're in, you're committed.
Compounding this is the nature of private fund returns themselves. During the early years of a private fund’s life, much of its reported performance is “paper” value—unrealized gains that depend on how the fund marks its investments. It may take years before these valuations are tested through actual exits. Until then, investors are relying on estimates and internal assessments that may not reflect real-world results. This makes early performance figures potentially misleading and adds another layer of opacity for those trying to evaluate private fund options.
Another key complexity comes from the diversity within the private fund universe itself. Not all private equity or venture capital funds are playing the same game. Some may focus on early-stage technology startups, while others invest in mature companies undergoing restructuring. Some operate in the U.S., while others focus on emerging markets. Sector specialization, investment stage, geography, and fund strategy can all significantly affect performance, risk profile, and liquidity.
If one were to compare all these funds side by side without controlling for these factors, the return dispersion would naturally appear vast. But once you adjust for these variables, you may find that much of the perceived difference in performance can be attributed to differences in investment style rather than managerial skill alone. It’s like comparing small-cap growth mutual funds to large-cap value funds—they may both be equity funds, but the comparison isn’t apples to apples. Similarly, when comparing private funds, the context matters deeply.
This highlights a problem for investors who evaluate funds purely based on historical performance. A manager who delivered top-quartile returns in one fund may have benefited from favorable sector or market timing rather than repeatable skill. And even if they did possess skill, the success of one fund doesn’t guarantee the success of the next. Each fund typically starts from scratch—raising new capital, sourcing new deals, and often facing different market conditions. This makes private fund investing a bit like betting on a new movie by a director who had one hit before: promising, perhaps, but hardly a sure thing.
Even for investors who are lucky—or savvy—enough to identify a truly exceptional manager, access isn’t guaranteed. Many of the top-performing private funds are closed to new investors or accept only capital from institutional players and ultra-high-net-worth individuals. Minimum investment thresholds can range from $250,000 to over $5 million. Even if you have the money, there’s often a relationship-based selection process. For most individual investors, these funds are simply out of reach.
That leads many to consider alternatives like private equity fund-of-funds. These vehicles pool capital from many investors and allocate it across multiple private funds, offering diversification and, in some cases, access to managers an individual investor couldn’t approach directly. However, this comes at a cost—both literally, in the form of additional fees, and figuratively, in terms of return potential.
Data from PitchBook shows that fund-of-funds tend to exhibit narrower dispersion in returns than the underlying private funds they invest in. This makes sense: by diversifying across multiple strategies and managers, they reduce the likelihood of both extreme success and extreme failure. For a new investor, this may actually be a safer way to gain exposure to private markets, even if the upside is more modest. But it also means that the dream of hitting it big with a single top-performing fund becomes far less likely in such structures.
In recent years, we’ve also seen the rise of so-called “evergreen” private investment vehicles, such as interval funds and tender-offer funds. These are structured to provide periodic liquidity—typically quarterly or annually—while still offering exposure to private market strategies. Though still relatively new, these funds represent an attempt to make private markets more accessible to high-net-worth individuals without the decade-long lockups that characterize traditional private equity.
The early data suggests that evergreen funds may also have more muted return dispersion. This is partly because they tend to invest across vintages and diversify widely to manage liquidity. They’re also less likely to make high-conviction, concentrated bets, since they must maintain a level of liquidity to meet potential redemption requests. That means less exposure to outsized winners—but also less risk of disaster. For investors seeking smoother performance, these funds may offer an attractive middle ground, though they still don’t typically reach the performance peaks of top-quartile traditional funds.
While some platforms now offer secondary markets where investors can sell their stakes in private funds before maturity, this secondary liquidity is not something to count on. Transactions can be slow, prices may be discounted, and not all funds allow transfers without prior approval. As such, investors should approach private funds with the mindset that their capital will be tied up for the full term, regardless of any secondary market developments.
Taken together, these realities paint a more complex and nuanced picture of private market investing than many promotional materials suggest. Yes, private equity and venture capital can offer exceptional returns—but those outcomes are not only rare, they are also increasingly difficult to access. The risks, meanwhile, are very real and often misunderstood. Between the lack of liquidity, the difficulty of selecting repeat performers, the challenge of gaining access, and the wide variance in outcomes, private fund investing demands caution, patience, and a deep understanding of what you’re getting into.
For new investors, especially those without institutional-level capital or access, it may be wise to begin with diversified, professionally managed vehicles that offer exposure to private markets with some degree of risk control. Over time, as experience and resources grow, more direct allocations to individual funds may become appropriate. But rushing into the private space without a clear strategy or without recognizing the structural challenges can be costly—not just financially, but in terms of opportunity cost and locked capital.
In the end, the best approach is a clear-eyed one. Private funds are not a golden ticket. They are tools—powerful ones—but only when used with care, diligence, and a realistic sense of both their potential and their limitations. As with any investment decision, the key is not just in finding opportunity—but in knowing how to navigate the risks that come with it.
So before you take the leap, be sure you’ve looked at where you’re landing. In private markets, getting in is easy to romanticize—but getting out, and getting a return, is a very different story.