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Freakonomics Radio

654. Is the Public Ready for Private Equity?

with Elizabeth DeFontenay, Steve Kaplan

Published November 21, 2025
View Show Notes

About This Episode

The episode examines the push to open private equity and other private markets to retail investors, especially through 401(k) plans, following a Trump administration executive order. Law professor Elizabeth DeFontenay and economist Steve Kaplan explain how private equity works, its historical outperformance versus public markets, and why that outperformance has likely diminished as the asset class has matured and become crowded. They warn that high fees, opaque pricing, illiquidity, and second-tier access mean that ordinary investors are unlikely to benefit from this shift, and that expanding retail exposure could change private markets themselves and increase systemic risks.

Topics Covered

Private equity Investing Retirement savings Venture capital Capital allocation Wealth inequality Crypto Securities regulation Unit economics

Disclaimer: We provide independent summaries of podcasts and are not affiliated with or endorsed in any way by any podcast or creator. All podcast names and content are the property of their respective owners. The views and opinions expressed within the podcasts belong solely to the original hosts and guests and do not reflect the views or positions of Summapod.

Quick Takeaways

  • Private equity historically outperformed public stocks on average, but that edge has shrunk as the industry has become crowded and valuations rose.
  • A Trump administration executive order directs regulators to facilitate access for 401(k) investors to private assets, including private equity, private credit, venture capital, and crypto.
  • Retail investors face high fee structures, illiquidity, and likely second-tier access to private deals, making these products much less attractive than low-cost index funds.
  • Institutional investors are currently unhappy with many private market allocations because capital is tied up in illiquid deals done at high prices in 2020-2022.
  • Both guests expect large private equity firms to benefit significantly from tapping retail money, while the benefits to ordinary investors are doubtful or negative.
  • Adding private assets into target-date retirement funds could quietly expose millions of savers to opaque, expensive investments without their active choice.
  • Public markets give retail investors correctly priced, liquid securities and the ability to index cheaply, which private markets cannot match.
  • Bringing retail capital into lightly regulated private markets is likely to increase legal scrutiny and litigation, potentially undermining what has made private equity and venture capital effective.

Podcast Notes

Introduction: Comparing Investment Options and Framing Private Equity

Expected returns of common speculative activities

Sports betting and lotteries as poor investments[1:12]
• Sports betting is described as zero-sum with fees, so the expected return is negative; you should only do it for fun, not investment.
• Lotteries are characterized as the worst option with a terrible expected return.
Crypto as a volatile but "fair" bet[1:39]
• Crypto is said to be very volatile but, if transaction costs and fees are low, can be considered a fair bet.
• The speaker says they do not know whether crypto will go up or down, but suggests that having some portion of a portfolio in crypto could be acceptable.

Public stocks and index funds as wealth-building tools

Index funds and stocks as positive expected return investments[2:10]
• Buying individual stocks at competitive fees or, better, low-cost index funds is framed as a fair bet with positive expected return.
• Over time, such investments are described as "how you build wealth."

Introducing private equity as a historically superior asset class

Claim that an asset class has outperformed stocks over 40 years[2:28]
• Dubner notes that research shows low-cost index funds offer good returns at relatively low risk, but says there is an investment category that has been outperforming stocks over the past 40 years.
• He explains that this investment was mostly unavailable to retail customers, limited to institutional and ultra-wealthy investors.
Trump executive order opening access to alternative assets[2:45]
• On August 7th, President Trump signed an executive order called "Democratizing Access to Alternative Assets for 401k Investors."
• Alternative assets listed include crypto, real estate, private credit, and specifically private equity investments.
• The order instructs the Department of Labor and the SEC to make this happen and not "go after" anyone who tries to do it, which is described as the only opening the industry needs.

Private equity industry turning to retail investors

Blackstone's new advertising push[3:19]
• Dubner notes Blackstone launched an ad campaign called "Eureka" shortly after the executive order, which pitches investing in "picks and shovels" like data centers and energy solutions.
Shift from institutional to retail capital[3:57]
• For 40 years, Blackstone and similar firms relied on institutional money from pension funds, sovereign wealth funds, and endowments and did not need to advertise to regular investors.
• Dubner says "the bloom is off that rose" and private equity firms are now looking for new investors, setting up the question of whether this is a golden opportunity or fool's gold for everyday investors.

Background on Private Equity's Growing Influence

Freakonomics' earlier coverage of private equity

Prior episodes on private equity's impact[5:27]
• Dubner references earlier episodes like "Do you know who owns your vet?" and one asking if private equity firms are plundering the U.S. economy.
• They also previously talked with Lina Khan about whether private equity gains too much power by buying many companies within the same industry.
Scale of private equity in the U.S. economy[4:58]
• Private equity firms are said to control about 20% of U.S. corporate equity, up from around 4% a couple of decades ago.
• Prior episodes focused on how private equity affects consumers, employees, and other stakeholders; this episode instead looks at investors now that retail investors can access private equity.

Guest 1: Elizabeth DeFontenay on Private Markets and Regulation

Elizabeth DeFontenay's background and practice experience

Academic focus on private markets[6:01]
• Elizabeth DeFontenay introduces herself as a professor of law at Duke University whose research is primarily in corporate law and corporate finance, with a special focus on private markets such as private equity, venture capital, and more recently private credit.
Path from practice to academia[6:26]
• She says she always intended to be an academic but wanted to practice law first to have interesting, real-world topics to write about.
• Her practice covered private equity "soup to nuts," including setting up funds, advising on how funds deploy capital, acquiring companies (M&A), and financing leveraged buyouts.
Why she left practice[7:14]
• She describes the private equity boom leading up to the financial crisis as involving enormous, fast-paced deals with sky-high valuations and "more than humanly possible" working hours.
• After the financial crisis, much leveraged buyout financing had to be restructured, which also generated a lot of work on the financing side.

Regulation of private equity versus public markets

Private equity on the regulation spectrum[8:25]
• DeFontenay states that private equity is on the "less regulated" side of financial markets.
• She emphasizes that securities regulation is powerful and burdensome but focused on public markets, whereas PE fundraising from institutional investors is extraordinarily lightly regulated.
Lack of disclosure obligations in private fundraising[9:15]
• A private equity firm can raise unlimited capital from entities like university endowments or pension funds with no disclosure obligations and very few obligations even to those investors.
• She contrasts this with concerns about hedge funds before the 2008-2009 crisis, when regulators did not know how many funds existed, their size, or activities, which may have contributed to systemic risk.
Systemic risk versus sector-specific concerns[9:46]
• For private equity, she sees less concern about systemic implications like causing a financial crisis, but more concern about their behavior in specific industries.
• Potential issues include antitrust concerns when rolling up firms in an industry, and labor law concerns.

Roll-ups, antitrust thresholds, and market power

Use of Hart-Scott-Rodino thresholds[10:20]
• Dubner mentions the Hart-Scott-Rodino reporting threshold of around $120 million and asks if firms deliberately stay under it when rolling up smaller companies.
• DeFontenay explains private equity has been successful in entering smaller markets because small-business acquisitions typically do not trigger antitrust reporting thresholds.
• She notes concern that in small markets, nobody is paying attention, and acquiring enough firms can create market power.
Example: anesthesiology market in Texas[11:09]
• She cites a case in Texas under a prior administration focusing on a large rise in anesthesia prices attributed to private equity entry into that market.
• She presents this as an example of how PE roll-ups can lead to higher prices and potential antitrust issues.

Private equity's comparative advantage in acquiring firms

Why private equity is effective at roll-ups[11:43]
• DeFontenay says the easiest way to make money in business is to monopolize or reduce competition and raise prices; anyone will try if they can.
• She argues private equity has a comparative advantage because their entire business model is acquiring firms, unlike operating companies whose main job is delivering services.
• They are "incredibly good" at sourcing deals, finding owners willing to sell, and convincing them.

Expansion of private equity into new sectors

Growth in physician practice ownership and other sectors[12:28]
• She notes that private equity ownership of physician practices in the U.S. is up around 700% since 2012.
• Private capital has moved into sectors that previously lacked third-party equity financing, including accounting firms, law firms in some jurisdictions, various healthcare spaces, residential housing, car washes, and pawn shops.
Debate over benefits versus harms[13:37]
• She frames a debate: one view is that previously undercapitalized mom-and-pop markets now get sophisticated capital and better products for consumers.
• The other view is that investors now know overall pricing and can buy up enough firms to raise prices and possibly reduce quality.

Industry size and concentration

Number of funds and dominance of mega-firms[14:03]
• DeFontenay says there are about 19,000 private equity funds in the U.S., more than the number of McDonald's locations.
• Most of these are small, but "behemoths" like Apollo, KKR, and Blackstone run massive funds and are the ones aggressively pursuing retail capital.

Guest 2: Steve Kaplan on Private Equity History and Performance

Kaplan's background and early research

Origins of leverage buyout research[15:28]
• Steve Kaplan, a professor at the University of Chicago, says he did some of the first work on leveraged buyouts in the 1980s when the phenomenon was new and controversial.
• He had to "scrounge around" for data because it was not easily accessible online.
Findings from early LBO research[15:24]
• His early work found that operating performance of companies taken private in leveraged buyouts improved.
• He says the story that LBOs gutted companies and led to poor performance was not true then and is still generally not true.

Definitions and evolution of private equity and leverage

What counts as private equity[16:29]
• Kaplan defines private equity as equity not publicly traded on stock markets; venture capital, some real estate, and leveraged buyouts are all forms of private equity.
From "leveraged buyouts" to "private equity"[17:16]
• In the 1980s, deals were called leveraged buyouts because they were funded with high debt, often 80-90%.
• A recession in the early 1990s led to many defaults; about 40% of deals done in 1987-1988 defaulted, making "leveraged buyout" a bad word.
• The industry rebranded itself as "private equity," and lenders subsequently reduced typical leverage to about 50-60% over the past 15 years.

How a leveraged buyout works and why it can generate high returns

Simple numerical example[17:45]
• Kaplan gives an example: buy a company for $100 million, borrow $50 million at 8-9% interest, and invest $50 million of equity.
• If the company value rises to $200 million through faster growth or efficiency, the buyer repays $50 million of debt and is left with $150 million in equity value.
• The original $50 million of equity has tripled to $150 million upon exit, which Kaplan calls an attractive return.

Public perception and media bias against private equity

Visibility of failures and profits[19:54]
• Kaplan believes there is a media slant against private equity, partly rooted in the 1980s defaults.
• Failed deals are visible job-loss events that attract negative attention, while successful deals where investors make a lot of money also draw criticism.
• He suggests negative stories get more attention than positive ones, shaping public perception.

Evidence on company-level performance and risk

Empirical studies on buyout company performance[20:38]
• Kaplan says that large-sample academic papers have consistently found that buyout companies become more productive, efficient, or profitable.
• He notes that for every negative anecdote, there are deals with very positive stories, and overall performance at the company level is good.
Comparing risk to the S&P 500[20:54]
• He explains that S&P 500 companies have less leverage than buyout companies but more exposure to tech-related risks.
• Studies comparing risk find that the greater risk in S&P 500 companies roughly offsets the leverage risk in buyout companies, making overall risk similar.

Long-run returns of private equity versus public markets

Vintage-year analysis of fund returns[21:35]
• Kaplan describes looking at all buyout funds raised in a given year and tracking their performance net of fees versus the S&P 500.
• For almost every year before 2020, these buyout funds beat the S&P 500 net of fees; only one year did not, and a couple were close, while about 25 of 27 years outperformed.
Underperformance of recent vintages[22:07]
• Funds raised in 2020, 2021, and 2022 are not beating the S&P 500.
• He explains that during the pandemic, after an initial dip, public markets surged, interest rates were very low, and deal prices in buyouts and venture capital became very high.
• Subsequent inflation and rising interest rates increased debt burdens in buyout deals and reduced valuation multiples in venture deals.
• Kaplan says many deals from 2021 involved mistakes on the investing side and then were hurt by higher interest rates.
Impact on exits and fundraising[23:31]
• Deals done at high prices in 2021-2022 are hard to sell at acceptable valuations, so private equity firms have sold fewer transactions than usual.
• As a result, many investments remain private and have not been taken public or sold, creating pressure on general partners because limited partners are waiting for cash returns before committing new capital.
• Kaplan notes fundraising for new funds has been down for two years and that the industry is getting smaller in terms of new commitments.

Disagreement over future outperformance

Kaplan's skepticism that the edge is gone[25:48]
• Kaplan doubts explanations that private equity's overperformance is entirely over because operational improvements at portfolio companies are real and not dependent on interest rates.
• He says buyout investors are still investing more or less as they did 10-20 years ago, suggesting institutions can reasonably keep allocating.
• He reiterates that over roughly 40 years, private equity performance has been superior to public markets on average.
DeFontenay's view that markets have converged[26:30]
• DeFontenay agrees on past outperformance but emphasizes that it has declined as the asset class matured and capital crowded in.
• More capital chasing the same deals pushed valuations up and returns down, reflecting market maturation.
• She argues that private equity has essentially converged with public markets, leaving no real advantage even for sophisticated institutional investors.

Opening Private Markets to Retail Investors: Promises and Pitfalls

Dubner's index-investing stance versus the new "democratization" pitch

Host as a boring index investor[29:39]
• Dubner describes himself as a boring buy-and-hold investor using low-cost index funds, teased by friends in finance but satisfied with his returns and ability to sleep well.
• He appreciates not having his money used for things he does not understand or might not like.
Comparing current changes to John Bogle's democratization of investing[30:09]
• Dubner recalls how John Bogle and Vanguard democratized cheap, accessible investing via index funds.
• He suggests that if he "squints," he could see a similar story being told about opening private markets to retail investors.
Why DeFontenay thinks it won't be as good[30:28]
• She says it will certainly not be as good for several reasons, starting with cost: private market investing is not cheap.
• Standard compensation to managers of private equity, venture capital, and private credit funds is described as enormous: 20% of profits plus about a 2% annual management fee on the whole fund.
• She contrasts this with index funds in public markets that can now be obtained "essentially for free."

Second-tier access and incentives to target retail

Retail investors likely getting worse deals[31:23]
• DeFontenay argues retail investors will almost certainly not get access to the same private investments as institutional or insider investors.
• Fund managers and private companies always prefer larger checks; retail investors are "very small checks" so capital from them will likely be accepted only for worse-end investments.
Why access is being opened now[31:17]
• She says the perfect question is why now, and answers that private equity, venture capital, and private credit have "completely tapped out" institutional money.
• To keep growing and earning more compensation, sponsors need new sources of capital and are turning to retail investors, not as a favor but out of necessity.
• She notes extensive lobbying over years to achieve this shift.
Institutional investors' current dissatisfaction[32:53]
• DeFontenay says large institutional investors in private equity and venture capital are currently "extremely unhappy."
• They have deployed large amounts of capital but are not getting cash back; investments are tied up in illiquid assets, and the markets are overcrowded so returns are not what they wanted.
• She notes institutional investors are pulling back; if private markets were truly permanent money-making machines, they would not be doing so.

"Party is over" metaphor and skepticism about retail timing

Main Street invited in late[34:47]
• Dubner characterizes Main Street ("dumb money") as being invited to the party just as the good guests have left and suggests they may do poorly.
• DeFontenay agrees, explicitly stating, "I think the party is over in the private markets."
• She says private markets will continue to expand their reach and do well, but the idea that they offer an incredible opportunity for retail investors is "very misguided."
• She disputes the marketing narrative that retail investors are losing out by being stuck in public markets and that private markets offer massive outperformance going forward.

Policy Changes: Trump Executive Order and 401(k) Plans

Content of the executive order

Directive to regulators[35:38]
• DeFontenay explains the executive order directs the SEC, Department of Labor, and other relevant agencies to do everything they can to allow 401(k) investors access to private markets.
• These agencies' oversight of 401(k) plans is crucial because they set standards for what plan managers must or must not do.
Broad definition of private markets in the order[36:16]
• The executive order defines private markets very broadly, envisioning not just private equity and private credit but also venture capital and cryptocurrency.
• It specifically lists cryptocurrency as a market that should be offered in 401(k) plans.

Shift in 401(k) offerings toward conservative, low-cost funds

Current prevalence of target-date index funds[36:53]
• DeFontenay notes that 401(k) plans have become more conservative over time, mainly offering public securities like target retirement funds.
• Target-date funds set a retirement date and automatically allocate money into index funds containing publicly traded stocks and bonds, adjusting over time.
• She says these investments have performed extraordinarily well and are incredibly low cost.
Risk of reintroducing high-cost, illiquid options[37:23]
• She warns that current changes would reintroduce 401(k) offerings that are high cost and potentially invested in illiquid assets, posing dangers.

Lobbying, litigation risk, and regulatory tension

Evolution of industry's attitude toward retail[37:59]
• DeFontenay says when institutional money was plentiful, private equity did not want retail capital because it added headaches.
• Only when institutional flows slowed did firms become eager for retail money, despite small check sizes and potential for investor lawsuits.
Executive order and fiduciary litigation[38:16]
• She notes the executive order aims to make 401(k) plan managers feel protected from litigation when offering private assets.
• However, the federal statutes (like those governing retirement plans) ultimately determine liability, and the order itself cannot shield managers from lawsuits.
• She argues the order actually increases litigation danger, because managers can be sued for offering high-cost products when lower-cost alternatives exist, creating a conflict with the order's implication that not offering private assets may be inadequate.

Crypto and Private Assets Inside Target-Date Funds

Concerns about crypto in retirement plans

Problems with crypto as a 401(k) investment[39:44]
• DeFontenay argues that crypto markets are opaque, with uncertain pricing efficiency and unclear links between prices and underlying asset value.
• She notes these investments are often highly illiquid and very different from traditional 401(k) holdings, where returns and underlying drivers are better understood.
Anticipated behavior of crypto firms[40:39]
• She expects crypto CEOs and funds to reach out to 401(k) plan managers to get onto plan menus.

Target-date funds as "promised land" for private asset managers

Different ways private assets might be offered[41:18]
• One option is to list private investments as standalone choices in 401(k) menus.
• But DeFontenay believes the real goal is embedding private market investments inside target retirement funds.
Hidden exposure and question of value[41:41]
• If private assets are included as a small sleeve inside target-date funds, investors might see this as diversification.
• She says the crucial questions are whether these are good investments in terms of returns and costs, not just diversification.
• She uses an analogy: putting cash under a mattress also diversifies returns versus public markets, but that does not make it a good idea.
• If private exposures are buried in target-date funds, "no one is going to know" or pay attention, making it easy money for private fund sponsors and "exactly, for them, the promised land."

Liquidity, Fees, and Access for Retail Investors

Liquidity challenges in 401(k)s with illiquid assets

Differences between pension funds and individual 401(k)s[42:58]
• Kaplan explains that pension funds manage liquidity by offsetting withdrawals by some participants with contributions from others, making illiquidity manageable.
• In 401(k)s, individuals need to access money when they retire, and illiquid investments can pose problems.
Proposed solution: PE sleeves inside larger funds[43:48]
• Kaplan says solutions under development involve setting up private equity investments as a portion of a larger, mostly liquid investment, such as adding a 10% private sleeve to target-date funds.
• He notes this could manage some illiquidity as long as private assets are priced in a fair and transparent manner, allowing people to move money in and out.

Kaplan's "mildly negative" overall view on retail PE access

Potential for too much money depressing returns[44:35]
• Kaplan worries that if everyone rushes in because it seems wonderful, too much money will chase deals, further depressing returns.
• In such a scenario, more of the value from deals would go to the sellers of companies rather than to investors.
Fee structures for institutional versus retail channels[45:04]
• He notes institutional investors already pay meaningful fees investing directly into buyout and venture funds, around 15 times what they would pay for S&P 500 exposure, plus 20% of profits.
• When modeled out, that fee load can amount to about 5% per year.
• In a 401(k) arrangement, retail investors would pay additional fees on top of those underlying fund fees, and these retail-level fees in existing vehicles are "not trivial."
Access via funds of funds and performance gap risks[46:04]
• Kaplan notes that retail investors generally will not invest directly into buyout or venture funds but through a fund of funds.
• This layering means retail investors may get different, potentially worse, returns than institutional investors who invest directly.

DeFontenay on asset pricing and retail disadvantages

Public markets as best environment for retail[46:46]
• DeFontenay emphasizes that public markets are the best possible scenario for retail investors because of abundant capital and liquidity.
• On average, securities in public markets should be correctly priced, allowing retail investors to index and capture overall market appreciation without doing research.
• They can "free ride" on others' information gathering and due diligence, which has been enormously profitable via indexing.
Opacity, illiquidity, and manager selection in private markets[47:52]
• She contrasts this with private markets, where prices and trading are opaque and illiquid.
• Retail investors must choose specific investments or at least choose investment managers, putting them at a large disadvantage versus big institutions already in these markets.
Lack of impact of her criticisms[48:07]
• DeFontenay says she does not face serious pressure to "shut up" because retail investors are unlikely to listen.
• She describes the current era as one of exuberance and intense speculation by retail investors, making her naysayer stance unlikely to influence policy, as shown by the administration's decisions.

Economic, Legal, and Distributional Implications of Retail Money in Private Equity

Scale of potential retail inflows and beneficiaries

Magnitude of retirement savings at stake[52:26]
• Dubner notes Americans hold around $13 trillion in retirement savings plans, including 401(k)s.
Projected share shifting into private assets[52:36]
• DeFontenay says that if the industry gets its wish, about 10% of that money might be invested directly or indirectly into private markets.
• She calls that a massive amount of money.
Who gains from this shift?[52:44]
• She expects private equity firms themselves to benefit greatly, calling 401(k) money a "goldmine" for them.
• Portfolio companies could also benefit via cheaper and more plentiful financing, as there is already "so much capital sloshing around" in private markets.
• This could lead to company growth and more hiring, though she finds it harder to predict long-term effects on wages and consumer prices.
Winners among intermediaries: law firms[55:22]
• DeFontenay says law firms are "very excited" because private equity sponsors used to operating with little regulation will now be dealing with retirement and securities laws when accessing retail capital.
• She notes a big clash between private equity's traditional space and the regulated space of retirement and securities markets, with law firms mediating it.

Fee layering and complexity of retail structures

Multiple fee layers in fund-of-funds products[53:22]
• DeFontenay acknowledges that competition may push some fees down at the first retail fund level.
• However, she stresses that if a retail fund then invests in underlying private equity and venture capital funds that still charge 2 and 20, investors effectively pay layered fees.
• She believes retail investors will have "no appreciation" for how fee layering erodes returns.

Transparency and disclosure limits

Will retail involvement increase transparency?[55:42]
• DeFontenay says the rules are not set up to require more disclosure about ultimate investments when retail enters private equity via fund vehicles.
• She doubts market pressures will force significantly more company-level reporting because retail investors will usually invest through a fund that does not have to disclose detailed use of capital.
• She contrasts this with public companies, which must continuously disclose operations and financials, whereas private equity-owned firms are not required to make public disclosures.

Impact on public markets and number of listed companies

Shrinking population of public firms[1:02:18]
• Dubner cites data that U.S. public companies dropped from 7,300 in 1996 to 4,300 as of the prior year.
• DeFontenay notes that while the number of public companies has shrunk, overall public market capitalization has not, because remaining firms are larger (e.g., NVIDIA, Apple).
Risks if public markets become too anemic[1:02:38]
• She warns that if money continues to be pushed out of public markets into private markets and fewer firms go public, public markets could become too concentrated.
• Most U.S. households are confined to public markets; if the universe of public firms shrinks too much, their portfolios may no longer represent the overall economy and may become a source of risk.

Venture capital: bad investment but crucial for growth

Tension between investor returns and societal benefits[1:04:17]
• DeFontenay says venture capital has been a bad investment even for very sophisticated investors over the last 20 years.
• Nonetheless, she calls venture capital crucial for economic growth and an engine of innovation, especially as government basic research funding has declined.
• She argues we can hold both views: venture capital is a bad financial investment on average, yet crucial for economic growth.
Regulatory stance toward retail involvement[1:04:39]
• From a regulatory standpoint, she prefers not to "trick" people into investing in bad things and does not favor pushing retail into these markets.

Behavioral Evidence, Paternalism, and the "Caveat Emptor" Economy

Retail investor behavior and default design

Empirical evidence on retail fund choices[1:00:05]
• DeFontenay says evidence shows that when retail investors were allowed to pick funds on their own in public markets, they made very poor choices.
• Contrary to hopes that education would improve behavior, they continued to fall into high-fee products that performed badly and ate away at retirement savings.
• She argues retail investors have done best when nudged into low-cost, diversified index-based plans via 401(k) defaults.
Concerns about a return to high-fee nudges[1:00:17]
• She fears a move back to an older world where investors are nudged into high-fee products they do not understand.
• She notes new dangers of bank-run-like dynamics if retail money is invested in illiquid products but investors seek liquidity.

Historical context and regulatory rollback

Origins of securities laws after the Great Depression[1:01:04]
• DeFontenay recounts that federal securities laws were adopted after the Great Depression because investors thought markets were fraudulent and prices untrustworthy.
• The goal of those laws was to restore trust by ensuring disclosure and segmentation between public and private markets.
Return to "anything goes" and possible future crash[1:01:27]
• She contends we are now undermining that logic, moving back toward a world where "anything goes" in investment offerings.
• She speculates that over the coming decades we may experience another big crash that forces a re-creation of the public-private dichotomy.

Effect on private equity and venture models ("PE/VC 2.0")

How retail capital could change private markets[1:05:24]
• DeFontenay worries that adding retail money will invite more scrutiny, regulation, and litigation into private equity and venture capital.
• She says these markets have always thrived on operating with little scrutiny and litigation; retail involvement will inevitably change that.
• She predicts a "venture capital and private equity 2.0" that looks different and might be a worse product than 1.0.

Caveat emptor framing and closing reflections

Move toward buyer-beware investing[1:05:54]
• Dubner says it feels like we are entering a "caveat emptor" economy more than before.
• DeFontenay responds that this is indeed the goal of many who think investment has been overregulated and advocate pure freedom of choice.
• She reiterates that empirically we know what will happen: retail investors will make poor choices.
Final summary and invitation for listener feedback[1:06:59]
• Dubner thanks DeFontenay and Kaplan for illuminating a part of the economy that "seems to prefer the shadows."
• He asks listeners what they think about the push to get retail investors into private equity and invites emails to the show's address.

Lessons Learned

Actionable insights and wisdom you can apply to your business, career, and personal life.

1

For most individual investors, broad, low-cost exposure to public markets via index funds remains a more favorable combination of expected return, cost, transparency, and liquidity than complex private market products.

Reflection Questions:

  • • What proportion of your current investments is in simple, low-cost index funds versus higher-fee, more complex products?
  • • How might your long-term outcomes change if you shifted a larger share of your portfolio toward transparent, low-fee public market index funds?
  • • What specific step could you take this month to audit your investment fees and reduce costly, opaque products?
2

When markets become crowded and capital floods into an asset class, historical outperformance tends to diminish, so basing decisions on past returns without examining current conditions is dangerous.

Reflection Questions:

  • • Where in your financial or business decisions are you implicitly assuming that past performance will continue unchanged?
  • • How could you better assess whether a "hot" opportunity today is already crowded and likely to offer lower future returns?
  • • What is one investment or project you should re-evaluate this week in light of how much capital has already chased it?
3

Fee structures and layers of intermediation can silently erode returns, so understanding who gets paid what-and from which level-is as important as evaluating the headline performance story.

Reflection Questions:

  • • Do you clearly know the all-in fees (including underlying fund and platform fees) on each of your investment vehicles?
  • • How might your net returns look over 10-20 years if current fee levels persist compared to a low-fee alternative?
  • • What concrete action can you take this quarter to simplify your investments and eliminate at least one unnecessary layer of fees?
4

Illiquidity and opacity change the nature of risk: assets you cannot price easily or exit quickly require more trust in managers and more tolerance for uncertainty than many retail investors realize.

Reflection Questions:

  • • How comfortable are you with not being able to access or accurately value a portion of your savings for several years?
  • • In what situations might you actually need liquidity sooner than you currently expect, and how would private, illiquid investments affect that?
  • • What boundaries could you set (for example, a maximum percentage of your portfolio in illiquid assets) to keep your overall risk within your comfort zone?
5

Default choices and product design powerfully shape average investor outcomes, so relying on "freedom of choice" without guardrails often leads typical individuals into high-fee, underperforming options.

Reflection Questions:

  • • Which of your current financial choices are the result of defaults you never consciously examined (e.g., your 401(k) allocation)?
  • • How could you redesign your own "defaults"-automatic transfers, target allocations, rebalancing rules-to align better with your long-term interests?
  • • What one default setting or automatic option in your financial life will you review and, if needed, change in the next week?

Episode Summary - Notes by Rowan

654. Is the Public Ready for Private Equity?
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