Why Some RIAs Might Fear Private Equity Investments

Registered investment advisors (RIAs) have historically been wary of suggesting alternative investments to clients, especially private equity. There are a number of reasons this happens. Large private equity funds are not easy to access, nor is private equity always easy to understand.

But things are changing. Mounting evidence indicates that traditional portfolio management strategies are failing in an environment with high inflation, rising interest rates, and economic uncertainty. While allocations to private equity firms were up 500% year-over-year as of mid-2022, recent data shows a more complex landscape in 2023. In 2024, global private equity fundraising declined by 30% to $680 billion, marking the lowest level since 2017. Yet, optimism persists. In 2024, private equity firms announced deals totaling $565 billion, a 25% increase in value and a 20% rise in volume compared to the previous year. Additionally, 73% of general partners anticipate heightened deployment activity in 2025.

While some RIAs have started incorporating private equity into their clients’ portfolios, many still hesitate. The barriers to entry, such as high minimum investment thresholds, complex due diligence requirements, and liquidity concerns, have made private equity a challenging asset class for smaller firms and individual advisors to navigate. However, with new platforms and technology-driven solutions making access to private equity more feasible, advisors who overlook this opportunity risk falling behind as investor interest continues to grow.

RIA Investment Buying Power Limitations

Historically, obtaining the minimum investment required by most private equity fund managers is a major obstacle. Lawrence Calcano, chairman and CEO of iCapital, notes that the traditional commitment levels required by fund managers can discourage potential investors.

“The minimum commitment levels required by fund managers from investors typically ranges from $5 million to $20 million, which makes many funds out of reach for all but the biggest investors. This reflects the fact that private equity has traditionally been the domain of large institutional investors, such as pension funds, endowments, and foundations,” Calcano said.

It is worth noting that the significance of these high minimum investments depends on the RIA. Larger players with high average account sizes can easily meet those minimums on their client’s behalf.  A report from Financial Planning highlights that firms with more than $5 billion in AUM comprised less than 12% of all RIAs, yet managed more than 92% of the industry’s assets. This concentration of assets among larger firms suggests they have greater capacity and resources to invest in illiquid alternative assets like private equity.

Substantial Due Diligence Requirements

Private equity investments require a great deal of due diligence to evaluate fund managers and potential deals. The process can be time-consuming and arduous. Many RIAs lack the resources to complete such due diligence on multiple, individual private equity funds for multiple, individual investors.

This is another area where things are shifting, though. In recent years, there has been an uptick in due diligence outsourcing to third-party service providers, thus decreasing the research and analysis burden for RIAs.

Lack of Private Equity Understanding

It’s difficult to explain private equity to clients, and many RIAs still need more education. Although private equity funds have significantly outperformed the S&P 500 over the last decade. Some RIAs still lack understanding of their potential risks and rewards.

“Alternatives as an asset class is a relatively new option for investors and advisors,” explained Calcano. “Advisers still need to educate themselves and climb the learning curve on these products to get a better understanding of the timelines, the fee and compensation structures, and the overall investor experience before discussing these investments with clients.”

Seeking further education could empower RIAs to more comfortably suggest private equity opportunities to their clients. Fortunately, with a plethora of resources available online, that education is easier to attain than ever.

The Nature of Private Equity

RIAs may struggle to pitch investors on private equity allocations because of the way they operate. These are are long-term, highly-illiquid investments. This sometimes makes them unappealing to clients or advisors.

Investors must also pay fund managers’ fees. The prospect of paying those fees and their impact on overall portfolio performance can sometimes be off-putting. Paired with the fact that fund managers do not always provide timely or adequate reporting, some investors may be skittish about their ability to evaluate investment success.

New Opportunities on the Horizon

Despite the hesitation to include alternative investments in their clients’ portfolios, RIAs may have an easier time accessing and evaluating private equity deals thanks to several companies.

In late 2019, for instance, Schwab Advisor Services created a new platform to provide alternative investment opportunities to RIAs through third-party sponsors. The platform eliminates custodial fees, and its first sponsor was none other than iCapital, which provides research and performs due diligence for RIAs.

Other platforms, such as CAIS, and companies like PPB Capital Partners and Republic Capital Group provide support for evaluating private equity investments.

RIAs will take some time to catch on to private equity as the SEC and the JOBS Act continue to open up the space for more and more investors. But catch up, they must. Private equity can be an important tool for portfolio diversification with higher return potential.

The bottom line? One way or another, RIAs need to figure out how to meet the burgeoning investor demand for private equity options if they truly want to help their investors reach their financial goals.

We think you’ll also like:

1. Finding Your Deal Flow in Private Investing
2. 6 Things to Consider When Selecting a Private Equity Investment
3. The Challenges Ahead for Private Equity Investing

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Tricks and Traps in Leveraged Finance
2. Current Trends in Leveraged Finance
3. Dialogue on the Overall Due Diligence

This article was originally published on July 13, 2016 and updated on March 7, 2023. This article was most recently updated by the Financial Poise Editors.]

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.