Ken Wiles is the Executive Director of the HMTF Texas Private Equity Center and Clinical Professor of Finance at the University of Texas at Austin. In this article, the PE data referenced are from PitchBook; TRS information was provided by the company; stock return data are from The Federal Reserve; and data on the number and value of crypto coins came from Coingecko.
Should private capital and crypto be included in retirement accounts? My answer is unequivocally, maybe. Let me explain.
Alternative assets, such as private equity and crypto currencies, are emerging as investments that people can hold in their retirement accounts. Yet retirement assets need to produce returns that can sustain an expected lifestyle throughout the retirement period, especially during bear markets. So before adding these new alternatives to retirement portfolios, investors must learn how and why they differ from traditional assets like stocks and bonds and decide if they can bear the risks.
Private Equity
Private equity (PE) is a type of investment that involves putting money into companies that aren’t traded on public stock markets. These investment funds often buy private businesses or take over public companies and remove them from the stock exchange. After acquiring them, the goal is usually to improve or restructure the companies to increase their value and potentially sell them later for a profit.
PE assets can provide diversification benefits, but they are not traded on public exchanges, are illiquid long-term investments, are subject to limited regulation, provide limited information to investors, have high investment costs, and are difficult to benchmark for performance (we focus here on private equity, but the discussion can be generalized to other private capital investments such as venture capital and private credit). Moreover, direct investments into PE funds are limited to accredited investors and require minimum investments in millions of dollars.
Despite those disadvantages, PE investments have often outperformed their publicly traded counterparts. From 2011 Q1 through 2022 Q1, annualize PE returns were 19.5% per year, while S&P 500 returns were 13.4%.
But everything changed when the Fed began raising the federal funds rate, from 0.25% in 2022 Q2 to 5.33% in 2023 Q3. Such rate increases, all else equal, reduce asset values, but the values of illiquid long-duration assets, like PE funds, are even more sensitive. Indeed, from the end of 2022 Q2 through the end of 2024 Q2, annualized PE returns were only 6.8%, while the S&P 500’s were 12.0%.
And such rate increases have continued to shock PE investors. Between 2021 and 2024, PE exit activity (sales and IPOs) more than halved, from $841 billion to $366 billion; deals fell from $1.238 trillion to $838 billion; and fundraising weakened from $377 billion to $285 billion.
With fewer exits, PE funds are struggling to return investor capital. Distributions to paid-in-capital, known as “DPI,” indicates how much capital has been returned to PE investors relative to their initial contributions. From 2008 through 2021, DPI averaged 117%, which means that, on average, investors received distributions of 1.17 times their capital contributions each year. Yet between 2022 and 2024, DPI fell to 4%, which means it would take 25 years for PE funds to return their investors’ initial capital.
Wealth advisors often argue that PE investments are less volatile than publicly traded equities, but this statement is unequivocally false. Public securities trade in deep liquid markets with observable prices, whereas PE securities rarely trade and often reflect stale prices (as of the time of the initial investment). Further, if the prices of assets held in the fund decline, PE fund managers are usually reluctant to mark their investments to current market valuations, hoping that prices will rebound prior to an exit.
PE valuations are volatile, even if the prices are not. For example, Theranos, a private company, raised about $350 million at a valuation of more than $9 billion in 2015. Over the next three years, the founders were charged with fraud, and, in 2018, the company failed. The price of Theranos stock did not change during those three years because there were no more priced funding rounds, while the value of the company collapsed to nothing. In other words, price volatility from 2015 to 2018 was zero, but the valuation volatility was very high.
PE will continue to be a meaningful component of capital markets, but the low interest rate environment that once supported PE valuations is over, and it will take years for PE managers to exit their investments. Therefore, investors holding PE in their portfolios must expect compressed exit valuations, lower returns, and longer holding periods.
Crypto Currencies
A cryptocurrency, often called “crypto,” is a form of digital money that operates over a computer network without needing a central authority like a government or bank to manage or regulate it. In the U.S., crypto is not currently legal tender, since it is a speculative and volatile piece of digital code or coin. There are more than 10,000 crypto coins in existence, valued currently at more than $3.3 trillion, with over 60% of it held in Bitcoin.
On January 1, 2020, Bitcoin was priced at $7,174, and by June 18, 2025, it had risen to $104,932 for a total return of 1,363%. During that period, however, there were 13 times when its value declined by more than 10%, one time by more than 20%, and one time by more than 30%.
For speculators, Bitcoin may be an attractive holding. For those saving for retirement, it is not attractive — unless the retiree has very long-term holding period or it makes up only a small part of the retiree’s portfolio. Having said that, I surely would like to go back in time and buy Bitcoin back in 2014 when it traded for $370!
Consequences
Many retirees have exposure to PE through their retirement funds, even if they don’t know it. For example, the Texas Retirement System (TRS) has more than $200 billion in assets under management overall, and about 30% of the fund is allocated to alternative assets including PE. The TRS is managed by professionals who are expected to better evaluate prospective investment vehicles and fund managers than the lay person.
There are also publicly traded funds-of-funds that permit individuals to invest in PE, but the fees tend to be quite high. And as noted, since 2022, institutional investors have been reducing their annual holdings of PE funds by about 30%. When savvy institutional investors curtail their PE allocations, retirees should also be wary.
Conclusions
Private equity and cryptocurrencies are speculative investment alternatives that are subject to material risk and high price volatility. Some who expect to live many decades in retirement, or the few that can absorb large losses without affecting their lifestyles, can consider holding PE and crypto for their diversification benefits. The rest of us would do well to seek out qualified and experienced financial advisors before adding these alternative assets to their retirement portfolios.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
