Barry Ritholtz’s book, How Not to Invest, offers a compelling exploration of common investment mistakes. His central thesis is that by simply avoiding unforced errors, investors can dramatically improve their outcomes. While the principles of public market investing are well-documented—if not always easy to follow—private markets remain less understood, partly due to their relative infancy. Still, the same cautionary mindset applies.
Private markets offer less transparency, fewer disclosures, and more conflicts of interest compared to public markets, making it harder for everyday investors to make informed decisions. While there’s enough material to write an entire book on the topic, this post highlights the most critical mistakes to avoid when investing in private markets.
To be clear, this doesn’t mean you shouldn’t invest in private markets. They offer compelling advantages such as diversification, active management, and higher potential returns. But the landscape is complex and opaque, and investors must tread carefully when selecting the right products and managers.
1. Bad Advice
In private markets, much of the advice comes from product sponsors themselves. Independent media and third-party researchers often lack access to data, relevant experience, or proper incentives to provide truly unbiased views. Criticism—when it exists—usually comes from public asset managers, who are themselves now entering private markets after a decade of fee compression.
Because many sources have a direct financial stake, their “advice” is often self-serving. Regardless of market conditions—recession, boom, or stagnation—private market products are always being pitched as the best idea. This resembles a financial pundit who invariably recommends “high-quality stocks” on CNBC, regardless of market conditions.
Key takeaway: Always evaluate the source of advice, their knowledge base, and their potential conflicts of interest before acting.
2. Bad Numbers
a. Unreliable Historical Data
Most historical data in private markets is incomplete, unaudited, or unreported. The concept of a consistent, comparable benchmark in private markets is virtually nonexistent. Claims based on “historical outperformance” often rely on optimistic assumptions or cherry-picked subsets of data.
Private markets also have shorter track records than public markets. As with hedge funds, alpha was easier to find when fewer dollars were chasing fewer deals. Today, with larger deal sizes and more participants, repeatable outperformance is far more difficult to achieve.
For example, private equity deals that once traded at 6x EBITDA multiples are now being priced at 12x EBITDA. Much of the industry’s historical success came from multiple expansion—a trend unlikely to continue.
b. Leverage as a Mirage
Private equity has historically relied on leverage—hence the term “leveraged buyout” (LBO). When debt was cheap, firms could enhance returns dramatically by borrowing more. But with rising interest rates and tighter credit conditions, this tailwind is fading.
Even in private real estate, which also heavily uses debt, returns have suffered recently compared to more conservatively financed public REITs.
Yet, very few sponsor presentations clearly show how much leverage was used to generate returns.
c. IRRs Are Not Returns
Private market performance is typically reported as IRR (internal rate of return) rather than absolute return. While IRR can be useful (especially for staggered capital flows), it is not the same as total return—and can be misleading when used for comparison to public investments.
If a sponsor casually substitutes IRR for return, consider it a red flag.
d. Volatility Laundering
Because private assets are infrequently marked to market, they appear to have lower volatility than public securities. This leads to what’s called “volatility laundering”—the appearance of stability without a corresponding reduction in actual risk.
Many investors mistake this lower volatility for safety, only to be blindsided by sudden, sharp markdowns.
3. Bad Behavior
a. Opaque Valuations
Valuations in private markets are often based on models rather than market prices. While sponsors may provide detailed valuation policies, these often include wide latitude in how assets are marked. This is especially dangerous in evergreen funds, where investors buy and sell at the stated NAV.
If NAV is inflated, you may overpay when entering and be undercompensated when exiting.
b. Unequal Treatment of Investors
Sponsors frequently offer better terms to larger or more sophisticated investors—lower fees, reduced carry, or access to co-investments—while smaller investors unknowingly subsidize the difference. These preferential terms don’t have to be disclosed to all participants.
Many investors have no idea they’re receiving inferior treatment.
c. Hidden Fees
Beyond management fees and carry, sponsors often charge a variety of additional expenses:
Marketing costs
Legal and accounting fees
Fund and SPV operating expenses
Distribution and administrative charges
Many of these go to affiliated entities and can become a meaningful revenue stream for the manager. While disclosed in fund documents, the true impact can surprise even experienced investors.
d. Overly Optimistic Proformas
To raise capital, some sponsors publish inflated projections—often showing 20%+ IRRs. In reality, very few investments achieve those numbers, and these models often rely on rosy assumptions that are unlikely to materialize.
Final Thoughts
This isn’t a complete list of pitfalls in private investing—but it covers some of the most common and costly. Most investors—and even many advisors—are not fully equipped to navigate the opaque and complex world of private markets.
That’s not to say these investments don’t have a place in your portfolio. If you’re a high-net-worth investor, the right private investments can offer attractive, differentiated returns.
But in this space, due diligence isn’t optional—it’s essential.
Considering a private investment?
Make sure you understand what you’re getting into—and don’t hesitate to reach out for help evaluating your options.