This post occurs at the intersection of two potential problems for investors:
- The growing offerings of private equity investments for retail investors, especially for 401(k)s.
- The illiquidity of private equity holdings since they are rarely marked to market.
Private Equity Caught in Crosshairs of Elise Stefanik’s Attack on Harvard
Lawmaker’s call for an SEC investigation into the school highlights the industry’s fishy valuation practices
By Jonathan Weil, The Wall Street Journal, July 1, 2025
…
So if the SEC investigates Harvard over the valuations [of its endowment], it should also investigate the private-equity firms that provide them, if not the whole private-equity sector. This could be helpful. With a full-court press under way in Washington to get private-market funds, like private equity, into Americans’ 401(k) retirement plans, it’s more urgent than ever that alternative investments reflect market realities, not wishful thinking.
The problem of stale or fishy private-equity valuations is well-known. The funds are supposed to mark their investments at fair market value. But the holdings tend to be illiquid and hard to value. This makes the fair-value measurements difficult for outsiders to challenge, and easier for managers to hold still.
The real problem arises when investors unexpectedly need cash and can’t sell the holdings at their stated values. On the secondary market, private-equity stakes usually sell at a discount to their official values. Last year, the average discount was 11%, according to Jefferies. It was 25% for stakes in venture-capital funds, a form of private equity…
The problem is investors are often allowed to keep using the reported NAV figures even if they know they are out of date or weren’t measured properly…
Some investment funds have exploited this loophole by buying stakes in private-equity funds at big discounts on the secondary market and marking them up immediately to their stated NAV. Sometimes the technique has resulted in gains of 1,000% or more in a single day… [end quote]
The example used by the article is the Harvard endowment which has $23 billion in private-equity funds. This is clearly only the tip of the iceberg. As of 2024, private equity firms worldwide managed over $8 trillion in assets.
Unlike the stock market, a very liquid market which generates prices moment by moment, the private equity market values could be wildly misstated.
The Wall Street Journal already published more than one article about the dangers of private equity for retail investors. Not only are the investments illiquid, the management fees are high.
If the SEC were to close the absurd loophole that allow the investor to use the reported NAV by the private equity firm even if the investor knows it’s completely unreasonable the entire private equity industry would crash. That’s because some of the clients wouldn’t want to own such funds anymore if they couldn’t legally rely on pretend, volatility-free numbers to show their own investors.
A very large, very illiquid, very inaccurate market is especially vulnerable to a financial crisis.
As a retail investor I wouldn’t touch this with a 10 foot pole. As a pension or endowment fund manager I would be working hard at establishing real valuations. But that would mean keeping two sets of books, one with the real values and one for the clients/ alumni/ retirees.
Wendy