Private markets: Transparency will define the next stage of market development
Providing clear and standardized information on performance and valuations has become critical to keeping the industry on its strong growth path.
Lower liquidity is generally seen as the biggest drawback of investing in private markets as opposed to public ones. But illiquidity might not be all bad. After all, investors are rewarded for assuming illiquidity risk and when they are locked into illiquid investments they are also less likely to succumb to the temptation to time the market.
It’s harder to find a silver lining for investors in the second biggest drawback of private markets: their opacity. In a recent global survey of investment professionals by CFA Institute, the top concerns regarding private markets were around transparency of valuation reporting, performance measures, and fees (see Figure 1).
These issues could hinder private markets’ attempts to become more democratic, with the lack of transparency posing even more of a deterrent to retail investors than to institutions, given that the former are unlikely to have access to networks they can turn to for insights about valuations and pricing.
Until recently, private markets’ higher potential returns had arguably overshadowed transparency concerns. A dollar invested in private equity in 2000 would have generated a nearly 20x net return by 2024, versus the 6.6x net return in public markets. But there’s no guarantee that private markets’ outperformance will continue, with some pointing to signs that there may be trouble ahead.
Fundraising across all private market asset classes in 2024 was at its lowest level since 2016, with the outlook decidedly unclear owing to lingering macroeconomic and geopolitical uncertainty. This could tip the balance for private markets firms, which, on the one hand, derive a bargaining advantage over their clients because of asymmetries of information, but, on the other, realize that greater openness will help attract more capital.
An established template
The Institutional Limited Partners Association (ILPA) unveiled a template for industry-wide reporting of fees and returns in a clear and standardized way in 2016, with updates and a new performance template released in January 2025. So far, roughly half of the market has adopted the template, and the rest could face mounting pressure to follow.
By providing greater transparency, firms could stand to benefit in several ways:
- A competitive edge: Openness can help firms stand out in a crowded field.
- Improved investor relationships: Transparency builds trust, reduces friction, and supports longer-term partnerships.
- Better risk management: In order to improve their performance and valuation reporting, firms need to step up their efforts to gather and analyze granular data. This can improve oversight, governance, and allow them to intervene early when they see issues begin to arise.
- Enhanced accountability: Clear reporting holds both managers and portfolio companies to a higher standard of performance and ethics.
Of course, increased disclosure will also create higher costs and administrative burdens, particularly for smaller managers. Technology will mitigate these, however, as the industry shifts away from its traditional reliance on manual processes and spreadsheets – and adopts automation and artificial intelligence to streamline operations, while improving accuracy and timeliness.
For example, private equity fund administration involves handling large amounts of data from myriad sources. The data can be collected and analyzed in real-time using application programming interfaces (APIs) and analytics tools. It can then be turned into a user-friendly format with data visualization tools and presented to clients on dashboards viewed through secure digital portals.
As time goes on, the gap between private and public markets in terms of data quality, transparency, and granularity will continue to narrow. This should bolster confidence and attract more capital. And as with any shift to a new market paradigm, the firms that lead the way in enhancing transparency could earn themselves an enduring advantage.
As demand for alternative investment strategies increases, CFA Institute is committed to educating investment professionals on these growing asset classes. Explore our private markets and private equity certificates.
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