Freakonomics Radio – Episode 654: “Is the Public Ready for Private Equity?”

Air Date: November 21, 2025
Host: Stephen J. Dubner
Featured Guests:

• Elizabeth de Fontenay, Professor of Law, Duke University
• Steve Kaplan, Professor of Finance, University of Chicago

Episode Overview

This episode delves into the emerging shift in U.S. investment policy: for the first time, everyday retirement savers (retail investors) can invest in private equity. Host Stephen Dubner investigates whether this newly “democratized” asset class is a golden opportunity for Main Street or an expensive, risky gamble. He’s joined by legal and academic experts who break down private equity's growth, performance, recent regulatory changes, and what the opening of these markets to millions of new investors might mean—for better and for worse.

Key Themes and Insights

1. Investing Choices and the Allure of Private Equity

• The episode opens with Dubner exploring how people choose where to invest—lotteries, sports betting, crypto, stocks—then zeroes in on private equity, which over the last 40 years has outperformed stocks but was reserved largely for the ultra-wealthy and large institutions until now.
  • [01:40] Steve Kaplan: “Sports betting? Zero sum. And there are fees. So your expected return is negative.”
  • [02:19] Kaplan: “You buy a stock at competitive fees or an index fund in particular. It’s a fair bet with a positive expected return. That's awesome. Over time, that's how you build wealth.”

2. Why Private Equity Is Opening to Retail Investors

• In Aug 2025, President Trump signed an executive order directing federal regulators to allow 401k investors access to alternative assets—including private equity.
• Major firms like Blackstone quickly responded, launching ad campaigns touting the “gold rush” of new investment opportunities.
  • [03:44] Blackstone Ad: “We finally made it. Now let's go get that gold…I got a better idea…”

3. Private Equity: History, Mechanics, and Regulation

• Private equity’s share of U.S. corporate equity has ballooned from 4% to over 20% in two decades.
• Traditionally, PE operated in lightly regulated spaces, raising capital with minimal disclosure—contrasting with strict public-market rules.
  • [09:28] Elizabeth de Fontenay: “They can raise an unlimited amount of capital without any disclosure obligations and very few obligations even to their own investors.”
• PE’s signature tactic: acquire many small firms—often below regulatory “radar”—to build market power, sometimes edging toward monopoly.
  • [10:50] de Fontenay: “There is just inevitably much less antitrust scrutiny when we’re talking about small businesses… If you acquire enough of these firms, you can actually start exercising market power.”

4. Performance: Past vs. Present

• PE’s historical returns have been strong, often outpacing the S&P 500 (net of high fees), but that edge has shrunk as the industry has matured and more capital has flooded in.
  • [21:49] Kaplan: “From almost every year before 2020, those [buyout] funds, net of fees, beat the S&P 500…That’s part of the reason so much money came in to private equity.”
  • [26:14] de Fontenay: “That outperformance has declined over time… Private equity has essentially converged with the public markets.”
• Recent PE fund vintages (2020-22) have not outperformed the public markets—a consequence of high asset prices, rising interest rates, and sluggish exits.

5. Access, Fees and Investor Disadvantage

• Opening private equity to retail investors introduces potential drawbacks:
  • High, layered fees (the standard “2 and 20” model plus additional fund-of-funds fees).
  • Restricted access to top-performing funds; retail investors likely get offered “seconds.”
  • Illiquidity—PE funds may tie up money for years, posing problems for typical retirement savers.
  • Minimal transparency—unlike public companies, private ones have no obligation for disclosure.
  • [30:49] de Fontenay: “Investing in the private markets is far from cheap… Compare that again to the private markets. The cost is incredibly high.”
  • [31:49] de Fontenay: “If they don’t want you to be invested in their company, they don’t have to sell to you…They are not going to be seeking out retail capital unless these are investments that are on the worst end of the spectrum.”

6. Industry Motivation: Chasing "Dumb Money"

• The biggest private equity firms (Blackstone, KKR, Apollo) have maxed out institutional capital and need fresh inflows—they’re not opening the gates for the benefit of retail investors, but for their own growth.
  • [32:47] de Fontenay: “They are doing it because they have tapped out the institutional money.”
  • [35:21] de Fontenay: “I think the party is over in the private markets. They will continue to do well and will continue to expand…but the idea that this is going to be this incredible investment opportunity for retail investors is very misguided.”

7. Policy and Risk: The New Executive Order

• The Trump executive order pushes regulators to allow and encourage private equity in 401ks—even extending to private credit, real estate, crypto.
  • [36:01] de Fontenay: “The executive order defines private markets extraordinarily broadly…They specifically list cryptocurrency as a market that they would like to see offered in 401k plans.”

8. Expert Skepticism and Investor Behavior

• Both guests believe traditional low-cost public market index funds remain the best option for retail investors.
  • [44:43] Kaplan: “I’d say I’m mildly negative [on retail access to private equity] …there are at least three reasons: too much money depresses returns…fees…and which funds retail will get access to.”
  • [46:53] de Fontenay: “I agree with it completely.”
  • [59:59] de Fontenay: “From a regulatory standpoint, my preference would always be not to try to trick people into investing in bad things…Call it paternalism if you will, but retail investors always do better when they are indexed in the public markets. That has been the absolute best possible investment for them.”

Notable Quotes & Moments

• [12:19] de Fontenay: “Their entire business model is acquiring firms… They are incredibly good at sourcing deals, finding people who are willing to sell their companies, and reaching out to them.”
• [19:19] Kaplan: “There is certainly a media slant against them. I think it comes back to the ‘80s where a lot of these deals defaulted…”
• [35:21] de Fontenay: “I think the party is over. In the private markets.”
• [41:05] de Fontenay: “If [private equity and crypto] are buried in a target retirement fund, no one is going to know and no one is going to pay attention. That is going to be incredibly easy money for these private fund sponsors, and that is exactly, for them, the promised land.”
• [58:33] Dubner: “I see an acceleration of an economy that’s already very generous to the investor class or, if you want to put it another way, to the wealthy…Could you say this might still be a net positive?”
• [64:45] de Fontenay: “[W]hat makes [PE and VC] special is precisely the thing that is going to change if we add retail money to the mix…That will look very different and might in fact be a worse product than 1.0.”
• [66:15] de Fontenay: “[W]e are really undermining…[the] logic [of securities laws]. We’re back to a world in which anything goes…Over the next couple decades, we’ll see where it goes…We might end up in a moment where we have another big crash and we have to recreate that dichotomy once again.”

Key Segment Timestamps

• 01:30 – 04:50: Setting up investment choices and introducing private equity
• 05:00 – 13:50: Elizabeth de Fontenay—history, growth, and regulatory evasion of PE
• 15:00 – 16:40: Steve Kaplan—origins of leveraged buyouts and evolution into modern PE
• 21:49 – 26:14: Comparison of PE vs. public markets, diminishing PE outperformance
• 30:49 – 35:53: Access costs and retail disadvantage ("second-tier" access and high fees)
• 36:00 – 40:00: Trump’s executive order, industry lobbying, new risks for retirement savers
• 44:43 – 46:53: Kaplan & de Fontenay summarize why they’re negative on retail access
• 55:14 – 58:33: Implications for customers, employees, lawyers, and society at large
• 63:10 – 64:07: Shrinking public market—concerns for inequality and system health
• 65:59 – 66:15: Final warning: “caveat emptor economy”

Takeaways for Listeners

• Private equity is no longer the exclusive domain of the ultra-wealthy, but the timing of its democratization may be suspect.
• Retail investors face high costs, less transparency, and the risk of being late to the game.
• The allure of diversification and higher returns is likely overstated; passive, low-cost index investing remains the proven strategy for most.
• Policy change is being driven by industry needs for new capital—not a benevolent desire to “level the playing field.”
• The shift could reshape retirement savings and the structure of financial markets, with potential ramifications for the entire economy.

[35:21] Elizabeth de Fontenay: “I think the party is over. In the private markets… But the idea that this is going to be this incredible investment opportunity for retail investors is very misguided.”

[44:43] Steve Kaplan: “I'd say I’m mildly negative…Fees are high, retail investors won’t get the same deals, and too much money may depress returns.”

[66:15] de Fontenay: “We’re back to a world in which anything goes…Over the next couple decades, we’ll see where it goes…We might end up in…another big crash.”

Bottom Line:
This episode provides a clear-eyed look behind the private equity marketing machine, warning that now—just as the industry matures and its best days may be behind it—Main Street is being invited in. Both featured experts urge skepticism: the “democratization” of private equity may benefit big finance most, not the average 401k saver. Proceed with caution.