Money Stuff: Opening Private Markets to the Public

A simple model is:

1. Regular retail investors pay index fund managers fees of approximately 0.03% of assets.
2. Sophisticated institutional investors pay hedge fund and private equity fund managers fees of approximately 2% of assets and 20% of returns, or sometimes much more.

One possibility is that the retail investors are getting a much, much better deal. Another possibility is that the institutional investors are getting much, much better investment managers. Probably there is some truth to both theories.

Of course this is a gross oversimplification. Institutional investors mostly don’t really pay 2-and-20 fees on their entire portfolios. Many of them put most of their money into regular stock index funds that charge very low fees, and some of their money into “alternatives” — hedge funds, private equity, venture capital — that charge high fees. But retail investors mostly don’t have any 2-and-20 investments at all.

There are a lot of reasons for this difference, but one pretty simple one is that US securities rules generally don’t let retail investors pay 2-and-20 fees. US law generally prohibits registered fund managers from charging performance fees, that is, fees calculated as a percentage of returns. There are exceptions for fund managers whose clients are all “qualified clients,” meaning that they have net worth of at least $2.7 million or at least $1.4 million of assets under management at the fund company. [1] So a hedge fund that takes money only in large chunks from institutional investors and rich people can charge 20% of gains, but a mutual fund that takes money in $1,000 increments from anyone mostly can’t.

Here is an  intuitive story you might tell about the effects of this rule:

1. If you’re very good at picking the stocks that will go up, you would rather do it for institutional investors in a hedge fund or private equity fund [2]  (and get a cut of your winnings) than for retail investors in a mutual fund (and not get a cut). 
2. Over time, the best investors will work at hedge funds and private equity funds and the, uh, second-best will work at mutual funds. 
3. The hedge funds and private equity funds will outperform the market, while the mutual funds won’t. 
4. People will notice, and tell retail investors: “Hey, the mutual funds that you buy don’t outperform the market, but they charge like 1% management fees. You could just buy the whole market in an index fund, get similar or better performance, and pay much lower fees.”
5. Eventually retail money will all migrate out of actively managed mutual funds that charge 1% fees and into index funds that charge like 0.03% fees. (This will push even more good investors out of mutual funds and into hedge funds or private equity.)
6. The retail investors will get market performance very cheaply.
7. The institutional investors, in the hedge funds and private equity funds, will get above-market performance, and pay for it.

This is not the only possible story, but it is a possible story. Is it a good story? Certainly it is better to get market performance cheaply than to get below-market performance expensively. Possibly it is better to get above-market performance expensively, depending on how expensive. This is a story in which retail investors have gotten much better pricing on their main investment (owning the stock market), but maybe less access to other, cooler investments.

Yesterday the US Securities and Exchange Commission proposed a bunch of changes to its rules to allow what it calls “responsible retailization of private markets.” The basic issue, which we discuss a lot around here, is that retail investors can invest in public markets, but not in private companies. Private markets have gotten bigger in recent decades, and now a lot of the good cool companies are private. Anthropic and OpenAI are each worth a zillion dollars, and private. SpaceX went public this June at about a $1.8 trillion valuation, meaning that the first $1.8 trillion of value created at SpaceX went to its private investors, not to public investors. [3]  This strikes people as a problem: Fancy institutions and rich people can own the good cool private companies, but ordinary investors can’t.

If you think this is a problem — and the SEC does — how do you fix it? There are about three possible approaches. One is to try to get more of the good cool companies to go public. For instance, change the rules to make it easier to be public: Make it harder for public shareholders to sue companies, or require less public reporting. The SEC is doing a lot of this. “Make IPOs Great Again” is the slogan for this approach.

Another approach, conversely, is just to let regular retail investors invest in private companies. The SEC is working on this too, and yesterday’s announcement included new “accredited investor” proposals that we will discuss below. But you can only go so far with this: Just saying “regular investors can buy any private stocks they want” effectively means getting rid of the US’s securities disclosure rules, which have largely worked well for almost a century. Plus regular investors couldn’t actually buy any private stocks they want: Maybe the best private companies would raise large checks from the best institutional investors, the worst private companies would raise small checks from dentists, and retail would be adversely selected.

The third approach, and the main focus of yesterday’s proposals, is to make it easier for individual investors to invest in private markets through funds. Private markets would still be open mostly to institutional investors, but those institutional investors would include funds that raise money from retail investors. Retail investors would get access to private markets, but not directly; they wouldn’t buy private companies themselves. But institutional fund managers who invest in private companies would have an easier time, under the new rules, raising money from retail investors.

One set of rules is about “interval fund modernization.” Private markets are less liquid than public markets. Public-market mutual funds generally offer daily liquidity: If you have money in a mutual fund, you can take it out with one day’s notice. This is pretty easy for the mutual fund to handle: If you take your money out, it can sell some stock to pay you. It’s harder, though, for a private equity fund. The SEC has rules for “interval funds,” public funds that invest in private securities and offer limited quarterly liquidity. If you want to take your money out of an interval fund, you can do it once per quarter and in limited amounts, sort of like the non-traded business development companies that have run into trouble this year. The SEC’s new rules will give interval funds more flexibility (to offer monthly instead of quarterly liquidity, for instance), to make it easier to run and market them.

The other set of rules is about performance fees. Basically: Now you’ll be allowed to charge performance fees (up to 20% of returns) to retail clients. The SEC says:

The use of performance-based compensation has long been a common and defining characteristic of investment strategies that are associated with private funds, such as hedge fund, private equity, and venture capital strategies. Because performance‑based arrangements have traditionally been associated with private funds, access to these strategies, as a practical matter, has been limited to a narrow group of eligible investors. By permitting similar incentives to, for example, advisers to regulated funds, such advisers may be more likely to offer private market strategies to regulated funds.

If the good investment managers can charge retail clients the good fees, the thinking goes, maybe they will sell them the good products. 

This is not the only possible analysis, of course. The Wall Street Journal notes:

Expanding the pool of potential investors is a priority of the private-equity industry at a time when many institutions such as pension funds and endowments are pulling back from the asset class. The industry’s main problem has been its inability to unload companies at attractive prices, leaving a huge backlog of unsold assets.

Private-equity fundraising has declined every year since 2023, a trend “driven by underwhelming returns” in the period since the frothy postpandemic years, according to data-tracking firm PitchBook. U.S. private-equity managers raised about $160 billion this year through June 30, roughly in line with 2025’s muted total, PitchBook said.

The SEC’s actions could help relieve the industry’s challenges. “We appreciate the SEC’s recognition of the longstanding role private markets have played in securing America’s public pensions—providing strong, stable returns and vital diversification for decades,” said Will Dunham, president and chief executive of the American Investment Council, private equity’s largest trade group.

If the good investment managers can charge retail clients the good fees, maybe they will sell them the good products, though right this minute the actual products are arguably a little tarnished. But if the good investment managers can charge retail clients the good fees, they will definitely charge them the good fees.

Like I said, most of what the SEC announced yesterday is about getting retail investors to invest in private assets through funds. There is one exception, though. Private companies are technically allowed to raise money from “accredited investors,” a term that has traditionally meant (1) institutions and (2) rich individuals. Over time, this category has become less exclusive: The main ways to be an accredited investor are by earning more than $200,000 per year ($300,000 for married couples) or having a net worth of more than $1 million. [4]  The rough numbers are that about 18.5% of US households qualify as accredited, while about 21% of US households own (public) stocks directly (as opposed to through mutual funds). So, as I have written, “the pool of people who can buy private investments is about as big as the pool of people who do buy stocks,” and the accredited investor test is not that high a bar.

Still, it feels very elitist to say that only wealthy people can buy the good companies. The theory is that wealthier people (1) might be more financially sophisticated and (2) can probably afford to lose more money. But it’s not obvious that’s true, the rule is controversial, and there is a widespread sense that even people who don’t meet the financial thresholds should be allowed to invest in private companies if they go in with their eyes wide open about the risk.

What does “go in with their eyes wide open” mean, though, in practice? I have, like, seven-eighths-seriously proposed my own non-financial test for investor accreditation. In my version, if you want to buy weird private stuff of any kind, “you just have to go to the local office of the SEC and get a Certificate of Dumb Investment”:

To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”

Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate.

If someone sells you a dumb weird private investment without checking your certificate first, they go to jail. But if you get the certificate and then buy the dumb weird investment and it goes to zero, and you complain, you go to jail. Caveat extremely emptor!

It is safe to say that nobody agrees with me on this. Instead, everyone else thinks that the way to ensure that retail investors go into private investments with their eyes wide open is by giving them a Certificate of Smart Investment. Like, you pass a test of your investing knowledge and acumen, and then you can buy the dumbest stuff imaginable, but you won’t, will you, because you’re so smart. Right? I once wrote:

The essential point about the Certificate of Dumb Investment is that it is not aspirational. It’s not that you go to the SEC and take a test and get 100% on the test and they’re like “congratulations you’re so smart” and you are like “I know right” and they give you the Certificate of Being a Smart Investor Who Can Buy the Good Investments Now and a little button saying “SMART INVESTOR” and you walk out of the SEC office wearing that button and you are absolutely mobbed by people selling structured notes. People selling financial products love investors who think they are sophisticated.

Anyway yesterday’s SEC announcement also includes a Certificate of Smart Investment:

The Commission separately seeks comment on the potential designation of the passage of an accredited investor exam to be developed by the Financial Industry Regulatory Authority (FINRA) as an additional method for investors to be accredited investors. An exam would provide a non-financial pathway for investors to demonstrate their sophistication in the areas of securities, investing, and financial and business matters to appropriately evaluate the merits and risks of a prospective investment.

Here are more details. A sample:

The Investment Risks section would be designed to test knowledge, comprehension, and skills with respect to the risks associated with exempt offerings. For example, this section would test candidates’ understanding of liquidity risks (e.g., resale restrictions, redemption restrictions, and risks associated with potentially longer investment horizons), issuer performance history (if any), concentration risks, diversification as a risk mitigation strategy, investment specific risks (e.g., dilution), the use of leverage and its potential to amplify losses, and the impact of fees and expenses on net investment returns. …

The Financial Statements section would be designed to test knowledge, comprehension, and skills to understand different types of financial statements, financial statement numeracy, and investment-related ratios and metrics. For example, this section would test candidates’ knowledge of the different types of financial statements (e.g., balance sheets and income statements), GAAP versus non-GAAP financial measures, and valuation ratios and metrics (e.g., debt-to-equity ratio, current ratio, internal rate of return, and bond calculations such as yield to maturity).

The Conflicts of Interest section would be designed to test knowledge, comprehension, and skills with respect to a variety of conflicts investors may encounter in exempt offerings. For example, this section would test candidates’ understanding of issuer and affiliate conflicts of interest, intermediary conflicts of interest, insider conflicts of interest, and investor conflicts of interest (such as tiered information access and other preferential treatment for certain investors). 

Sounds sophisticated.

Every year, US public companies ask their shareholders to vote on stuff: re-electing directors, approving executive pay, (until recently) non-binding shareholder proposals. Some shareholders pay attention to this stuff, and vote. In particular, institutional asset managers tend to think that they have a fiduciary duty to pay at least some minimum quantity of attention to this stuff, so they will normally vote. (Many have traditionally paid the very minimum quantity of attention, and just outsourced their voting to proxy advisory services; these days that is a bit more controversial so they outsource it to AI instead.)

Other shareholders don’t pay attention, and don’t vote. In particular, retail shareholders stereotypically don’t vote. This is generally very rational of them: Voting 10 shares of stock takes time and has essentially no benefit. 

What happens to their votes? If 40% of shareholders vote for some proposal and 30% vote against and 30% don’t vote, then it gets “a majority of votes cast” and probably passes. But some things (mergers, etc.) require “a majority of shares outstanding,” and in that case it wouldn’t pass. That is, if you don’t vote your stock, then:

• Usually you are letting the people who do vote decide for you, except
• For some very important corporate decisions, you are effectively voting No.

Those are pretty intuitive outcomes! Like:

• The people who don’t pay attention really might rationally prefer to defer to the people who do pay attention, but
• Big important fundamental changes should only happen if a majority of shareholders pay attention and agree to them.

Fine. There are other possibilities, though. We talk occasionally about “retail shareholders who don’t care should be allowed to sell their voting rights to people who do care,” which has an obvious appeal but mostly hasn’t taken off. But another possibility is:

• If you don’t vote, you should let the company’s management decide for you.

That is, in some abstract model of democracy, “if you don’t care, you’re letting the people who do care decide” makes sense. But if you bought shares in a company, that might suggest — at least as a default — that you trust the managers of the company. If you don’t care about the details of some vote, maybe “let management decide” better captures your unexpressed desires than “let the shareholders who do care decide.” Maybe the shareholders who do care are not representative of the ones who don’t; maybe management is.

And so, if there’s some shareholder proposal like “the company should write a report about climate change,” and 40% vote yes and 30% vote no and 30% don’t vote, maybe that really means that 40% want the company to do something different and 60% — the nos and the nonvoters — think “meh it’s fine as it is.” Or if the company asks shareholders to vote to approve executive pay, and 30% vote yes and 40% vote no and 30% don’t vote, maybe that really means that 40% of shareholders are engaged and angry and don’t want the executives to get paid that much, but the other 60% are like “ehh it’s fine, we like management.”

I’m not sure that’s correct: Retail shareholders could be pretty annoyed with management, but still not annoyed enough to go and fill out proxy cards for their small holdings. But you could ask them. Bloomberg’s Todd Gillespie reported Monday:

Goldman Sachs Group Inc. plans to give individual shareholders the option of letting the board of directors decide how their votes will be cast, a year after coming closer than ever to having its executive compensation proposal rejected.

Regulators gave a green light to the firm’s request to give retail investors the option of voting with the board by default, according to a Securities and Exchange Commission letter Monday. Those investors account for roughly 30% of Goldman’s shares, according to a person familiar with the matter.

The change is likely to increase turnout in a way the boosts support for the company’s position on key proposals at annual general meetings, where in recent years Goldman has faced significant objection to large pay packages for its top executives.

And Tuesday the US Securities and Exchange Commission granted Tesla Inc. permission to implement a similar program in which retail investors could default to letting Elon Musk vote their shares. I mean, not literally Elon Musk; the shares would be voted “based on the recommendation of the company’s board of directors.” 

This approach was pioneered by ExxonMobil Corp., and we talked about it a few months ago. An Exxon shareholder complained that, if “always vote with the board” is an option available to shareholders, then “always vote against the board,” or “always vote the way proxy advisers suggest,” should also be options. I just think that’s wrong? I understand why this option annoys good-governance advocates, because it really does have the effect of entrenching management and giving the board free rein to run the company. But also “give the board free rein to run the company” really is a plausible model of what inattentive retail shareholders want. Especially at Tesla.

Incidentally, we talked yesterday about the prospects that agentic artificial intelligence will eliminate retail-investor inattention. (Which will be bad for banks, which rely on inattention, and very very good for Robinhood, which relies on attention.) I suppose you could tell some sort of related story here, like, “retail investors will be able to actively vote all of their shares on everything by instructing their AI agent on what to do.” But what will they tell the agent to do? “Vote however you think is best”? I feel like the simplest answer is “just re-elect the directors, approve the pay, and don’t vote for any weird proposals”: That is, just defer to management. And at Tesla, the retail shareholders will obviously tell their agents “just vote for whatever Elon wants.” 

There is a lot of finance theory about conglomerates. If you have a widget company, and I have a sprocket company, and we merge them into one company, there are advantages and disadvantages. Some of these are managerial (“you can apply best-in-class management skills to multiple businesses” vs. “the managers are unfocused and distracted by multiple businesses”) but some are more corporate finance-y. The main financial advantages and disadvantages of conglomerates are:

• A conglomerate that combines two uncorrelated businesses is safer than either business alone: Sometimes widget sales are down but sprocket sales are up, meaning that the company can muddle through a widget downturn without going bankrupt. The conglomerate is more attractive to debt investors because its risks offset each other, and debt investors hate risk.
• But “a basket of options is worth more than an option on a basket”: Shareholders might prefer to own a widget company and a sprocket company separately, because they get the upside on each investment but their downside is floored at zero. If the widget industry dies out but the sprocket industry booms, a shareholder of separate companies does well: Her widget investment goes to zero, her sprocket investment returns 1,000%, and she’s happy. But if she owns a widget/sprocket conglomerate, it might spend years losing money on widgets, subsidized by its sprocket profits; its widget losses are not floored at zero. The conglomerate might be less attractive to equity investors, because its risks offset each other, and equity investors love risk.

There is another, related but slightly different set of investor-targeting advantages and disadvantages:

• Some investors might really like widgets, and some might really like sprockets. If you run a widget/sprocket conglomerate, you might attract both sets of investors, and so appeal to more investors than either company alone. 
• Alternatively, if you run a widget/sprocket conglomerate, you might attract neither set of investors. There might be specialized widget investors who ignore you, and specialized sprocket investors who ignore you. If you separated into two focused companies they might each be able to attract new investors. You can tell a clearer story (rather, two clearer stories) to the market.
• And if an investor did want a diversified widgets-and-sprockets bet, she could just buy shares of both companies. You don’t have to give her that diversified bet at the corporate level; she can do it herself.

This is pretty standard stuff. We have talked about all of it in connection with Elon Musk’s conglomerating and de-conglomerating impulses.

Separately, we talked a few months ago about a sports gambling exchange-traded fund. Obviously I loved it, but I was a bit skeptical. The sports gambling ETF would manage a diversified portfolio of sports bets. This would make it less risky than a sports gambling ETF that bet only on, like, “the Knicks will win the NBA championship.” As a product for your retirement fund, sure, makes sense, I guess. (???) But … it’s … sports … gambling? Presumably much of the appeal of sports gambling is, like, picking the team you want or expect to win and betting on them? And so a sports gambling ETF that is like “we’ll do some sports gambling for you and give you the proceeds” is missing an important part of the appeal of sports gambling. I’ve pointed out that really what you want is, like, a Knicks ETF, because then people who like the Knicks could bet on your ETF.

The point here is, maybe, that diversification in sports betting is bad, at the fund/product level. Some people want to bet on the Knicks, some people want to bet on the Spurs, some people want to bet on the Clippers, but (1) very few people want a diversified bet on all of them and (2) if they do, they can construct it themselves. “Here’s a diversified sports bet” is just going to appeal to fewer people than “here’s a Knicks bet.”

Anyway:

The New York Knicks and Rangers will soon be available for purchase separately on the stock market.

MSG Sports, which owns the NBA and NHL teams, announced Wednesday that it will split the two franchises into separate publicly traded companies after its board of directors approved the move this week. The company has explored the move since earlier this year and expects to complete the transaction Oct. 26. The spin-off comes after a year of high-profile success for the Knicks, who won the NBA title in June, and as the Rangers work through a rebuild after missing the playoffs the last two seasons.

MSG Sports, currently a publicly traded company, will become MSG Knickerbockers Corp. It will own the Knicks and Westchester Knicks (their G League team). MSG Rangers Corp. will be comprised of the Rangers, the MSG training facility and the Hartford Wolf Pack (the Rangers’ AHL team).

I mean, sure. Presumably there is a market for, like, “here’s a diversified bet on New York sports teams” — lots of people like the Knicks and the Rangers — but if you want that you can just buy Knicks and Rangers shares separately. That doesn’t give you any New York baseball, football or soccer exposure, but you can get that on Kalshi.

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