Retail Investor Participation in Private Equity

I doubt that many individual investors are sophisticated enough to understand the fee structure and hidden risks of private equity. I agree that the income and wealth barriers to participation are crude and could be improved (for example by using online education and testing).

A small paternalist regulation that one might as well clean up. No, the little dears are not too dumb to invest their money and caveat emptor. No big increase in welfare unless PE expands a lot. A small sock drawer of the hoarder nightmare of our financial regulatory mess.

These investments are too opaque for smaller investors and have very high fees.

In 2020, SEC relaxed the retail constraints. Being "rich" is no longer required. Moreover, agency-based access to PE (e.g. through BlackRock, Vanguard, etc.) is available and probably more effective for most retail investors, given the complexity of limited partnerships.

Private equity investing is now somewhat opaque. No solid information is provided to investors except at times of major events. The regulation of private equity reporting would have to change a lot if it were open to smaller retail investors.

Relaxing this regulatory constraint should improve welfare. In 2016, Canada adopted an exempt status to allow non-accredited investors to make limited private equity investments. More generally, US definition of accreditation should change: it is based on wealth not knowledge.

Benefit is opening up set of available investments. Potential cost is excessive fees.

substantial improvement is a high bar

Retail investors would be likely to disproportionately invest in underperforming PE funds. Due to weak disclosure requirements, retail investors would be less able to ascertain fund / manager quality. Moreover, the best funds would be more likely to limit participation.

On the margin, more participation could be good (as in risky assets in general), but one worries about investors getting into illiquid unsuitable products for their level of financial sophistication

Welfare will increase for sophisticated retail investors through the benefits of diversification. A segment of the financial industry will offer very shoddy PE products, which will decrease the welfare of unsophisticated retail investors. The net effect is difficult to evaluate.
-see background information here

Retail investors will likely get adversely selected against, especially in illiquid private markets. They also have more stringent liquidity needs and the slow marking of private valuations that benefits institutions likely hurts retail investors.

Many participating retail investors would be pulled into illiquid high-fee products with low after-fee returns and minor incremental diversification benefits

Sophisticated investors can invest in private equity already. Small retail investors are unlikely to benefit from more complex investments or contribute to efficient allocation of capital. Firms that want to raise capital from retail investors can tap public markets.

Implementation will be important. There are obviously large diversification/wealth benefits for smaller investors.

Long-term investors would benefit from low-cost access to more illiquid investments.

Seems a challenge to have retail products that successfully address the liquidity issue while still replicating returns associated with traditional private equity where illiquidity seems inherent.

While retail investors could benefit from being able to invest in private equity funds, it is not clear they would benefit from investment in all private equity funds. The selection process may not be to the retail investors' advantage.

Research shows that private equity (buyouts, VC, real estate, infrastructure) funds do not generate positive risk-adjusted return, relative to traded risks in public markets. In the long-run some risks may no loner be available in public markets, however.
-see background information here