This article was first published by Robin and Mark here.
Incentives Are Dangerously Aligned in Private Markets
The Speculative Supply Chain is Operating at Full Capacity
“Nothing is easier than self-deceit. For what every man wishes—that he also believes to be true.”
—DEMOSTHENES (349 BCE)
Summary
It has been two months since my last newsletter, which is largely due to the amount of thought and effort required for this one. It argues that today’s private markets boom exhibits the same structural conditions that have preceded past financial crises. The three defining attributes are segmented risk creation, near-perfect alignment of incentives across an expansive supply chain, and a deeply rooted but flawed assumption about the nature and durability of private markets. Drawing on more than 200 years of financial history—and using the 2008–2009 Global Financial Crisis as a reference point—it shows how institutional allocators, investment consultants, fund managers, wealth advisors, trade associations, academics, and the trade media each act rationally according to their own incentives while collectively amplifying systemic risk.
By tracing the sources of these dynamics upstream, it becomes clear that the rapid growth of evergreen and semi-liquid private-market vehicles is not innovation, but rather a late-cycle mechanism for warehousing illiquid assets, delaying price discovery, and sustaining the appearance of stability. The warning here is not about bad actors; it is about a system whose incentives have become so tightly aligned that, if stress emerges, the resulting damage could be severe. Retail investors, positioned at the end of this speculative supply chain, must be especially vigilant.
The Speculative Supply Chain
After studying multiple financial crises over the past 235 years, I developed a deep respect for an uncomfortable reality: the most damaging crises are almost never caused by a small group of bad actors. This realization lays bare the flawed, but instinctual human, preference for simple and swift explanations. In the aftermath of a crisis, this is why we tend to gravitate toward narratives that bluntly assign blame to a handful of villains for having caused the entire event. This may feel emotionally satisfying, but it is rarely accurate.
To be clear, there will always be a subset of individuals who engage in especially egregious—and sometimes illegal—behavior, and they should be dealt with in proportion to the severity of their actions. But this alone is not nearly sufficient to explain systemic financial crises. Far more often, it is the product of millions of actors taking billions of small actions across an expansive and siloed supply chain. Each participant acts according to incentives that seem consistent with their immediate responsibilities and are defensible locally. Many may feel discomfort when bending rules, threading loopholes, or simply extracting more value than they contribute because they can, but few envision how doing this collectively, simultaneously, and without meaningful accountability mechanisms can produce outcomes wildly disconnected from any single person’s intent.
The tragic irony is that millions of individuals responding rationally to perfectly aligned incentives at the same time have historically proven far more dangerous than a small group of especially bad actors. Such conditions preceded crises in the 1810s, the 1830s, 1907, 1929, 1999, and 2008–2009.
Today, I strongly suspect we are observing the same conditions in private markets. This newsletter explains why.
Key Attributes of a Speculative Supply Chain
One way to understand speculative episodes is to think of them like manufacturing supply chains. Based on the experience of past financial crises, three core attributes consistently emerge. Each is outlined below using the 2008-2009 Global Financial Crisis (GFC) as a reference point.
1️⃣ Risk Segmentation
Segmentation of risk in an assembly line-like formation is a crucial component of a systemic financial crisis. Each segment adds risk to the production process, but it is extremely difficult for any participant to fully understand how the risk compounds as it moves through the system.
During the GFC, independent mortgage originators relaxed underwriting standards to increase loan volume. Those loans were then sold to investment banks, which repackaged them into mortgage-backed securities. These securities were then purchased by institutional investors, placed into funds, and ultimately sold to retail and institutional investors. Many participants at each station likely sensed that risk increased locally, but few considered whether it was being further amplified elsewhere in the chain and how those amplifications compounded. Figure 1 shows the key components in the GFC and the house of cards that emerged at the end.
Figure 1: The GFC Speculative Supply Chain1
The relative isolation of different segments of a speculative supply chain is what makes systemic crises so difficult to see in real time. Almost no participant has sufficient visibility. In The Big Short, what distinguished figures like Michael Burry and Steve Eisman was not intelligence alone, but rather it was their unusual visibility into the entire supply chain. They were intelligent for sure, but many equally intelligent people failed to recognize the danger simply because they lacked the same visibility.
2️⃣ Incentive Alignment
The second attribute required for a systemic financial crisis is the near-perfect alignment of incentives among all participants. In many cases, alignment extends well beyond direct participants.
During the GFC, mortgage originators, investment banks, and fund managers all shared a common incentive to increase the volume of mortgage production and the issuance of mortgage-backed securities. But the alignment did not stop there. Additional risk amplifiers included ratings agencies (e.g., Moody’s), specialized insurers (e.g., AIG), and prominent voices in the financial media. Each benefited directly or indirectly from higher origination volumes, greater securitization activity, and expanding asset pools.
Critically, no major participant had a strong economic incentive to slow the assembly line. Fee structures, compensation models, market share dynamics, and political pressures all leaned heavily against restraint. Had even one systemically important segment been incentivized to reduce production volume or tighten underwriting standards, the crisis may have been averted—or at least rendered less catastrophic.
3️⃣ Deeply Rooted But Flawed Assumption
“There is no national price bubble [in real estate]. Never has been; never will be.”2
—DAVID LEREAH, chief economist, National Association of Realtors (2004)
At the core of every speculative episode lies a nearly universal assumption that later proves to be fundamentally wrong. In the 1810s, Americans purchased farmland aggressively thinking that wheat prices would remain elevated indefinitely. In the late 1920s, Americans believed it was safe to purchase stocks on margin because they assumed equity prices would never suffer sustained declines. During the GFC, people assumed that residential real estate prices would never decline on a national level.
The presence of a widely held—but fundamentally flawed—assumption allows participants in a speculative supply chain to systematically underestimate the incremental risks that they add to the system. Because the flawed assumption is rarely questioned and instead reinforced by recent experience, it provides the psychological comfort necessary to allow risks to remain unchecked.
The Private Markets Supply Chain
Historically, the aforementioned attributes were observable prior to the onset of a major financial crises. It is alarming, therefore, that all three are now visible in private markets. From end to end, each participant in the supply chain operates with incentives that are nearly perfectly aligned to increase production and overlook the erosion of underwriting standards. Moreover, indirect participants, such as the trade media, trade associations, and even academia, amplify production pressure and/or grant unearned legitimacy to the final product. The role of the major participants in the private market supply chain are as follows.
Direct Participants
1️⃣ Institutional Allocators
Over the past 25 years, staff at institutional investment plans (often referred to as allocators) have dramatically increased allocations to alternative asset classes (Figure 2). A large portion of inflows have gone to private equity and, more recently, private credit funds.
The herd behavior began in earnest soon after investors noticed the exceptional returns produced by the Yale University Endowment between 1985 and 2000. Many allocators assumed that blunt allocations to alternative asset classes were the key ingredient of Yale’s success. Moreover, they assumed that the Yale model was broadly replicable and scalable across institutions with vastly different governance practices, relative scale advantages, and access to professional talent. As allocations expanded, however, the underlying incentives subtly shifted from exploiting a perceived opportunity to preserving the professional roles that the opportunity created.
Over time, compensation, career progression, and job security became inexorably linked to the complexity of allocations rather than objective analyses of the results that they produced. Deviating from that framework by streamlining portfolios and reducing costs introduced substantial career risk. Once these incentives were firmly entrenched, allocations to private markets became self-reinforcing, while reductions became increasingly risky to allocators. These incentives remain extremely powerful today.
Figure 2: Growth of Alternative Asset Class Allocations in U.S. Public Pensions, 2001-2024
Source: Public Plans Database (PPD). Asset allocation data from “National Data – Asset Allocation for State and Local Pensions, 2001–2024.” Author’s calculations.
Note: “Alternative assets” defined as private equity, real estate, hedge funds, commodities, and miscellaneous alternatives as reported in the Public Plans Database. Categories combined by author.
2️⃣ Investment Consultants
“U.S. plan sponsors managing over $13 trillion rely on investment consultants for advice about which funds to invest in…We find that consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows, but we find no evidence that these recommendations add value to plan sponsors.”3
—TIM JENKINSON, et. al. (September 2013)
Investment consultants first emerged in the late 1960s to perform independent performance reporting for institutional investment plans. In this role, consultants measured and compared the performance of portfolios which, at the time, were typically managed by bank asset-management departments.
Over the past five decades, however, consultants slowly but steadily expanded their roles. Performance reporting was supplemented with asset-allocation advice, portfolio construction, manager selection in public markets, and eventually facilitation of access to private markets. In other words, what began as an independent oversight function morphed into a portfolio design role.
A big problem is that, while consultants are now the architects of institutional portfolios, they never relinquished title to their roles as independent performance reporters. In effect, consultants reinstated the very conflict of interest that they originally sought to resolve.
More importantly, investment consulting firms are now deeply dependent on portfolio complexity. Introducing new asset classes, tinkering with existing strategies, and continuously replacing managers sustains perceived relevance and justifies fees. Yet, at the same time, consultants bear little accountability for long-term outcomes. When results disappoint, responsibility is attributed to some combination of markets, managers, and asset class cycles rather than calling into question the quality of the advice offered by the architects themselves.
The result is a powerful incentive to increase complexity without experiencing commensurate accountability for the results.
Recommended Reading
3️⃣ Private Equity Fund Managers
“Investment discipline is the phrase that’s got to come back and be talked about. In the beginning, the innovators of this idea, of whom I was one, had a great deal of discipline . . . What has happened is imitators by the hundreds have gotten into this business and as imitators flocked in, discipline has eroded.”4
TED FORSTMANN, founder of Forstmann Little (1996)
Modern private equity funds trace their origins to the late 1970s and early 1980s. The United States was emerging from the Great Inflation, and several powerful tailwinds converged for the benefit of this nascent industry. U.S. corporations had diversified excessively, interest rates were falling, and equity valuations were rising. These conditions created fertile ground for leveraged buyouts and allowed private equity to generate extraordinary returns.5
By the 1990s, those tailwinds had faded. Corporate structures were leaner, interest rates settled, new fund managers proliferated, and returns moderated. By the end of the twentieth century, private equity returns had compressed closer to public market equivalents, especially after considering underlying fees and the administrative costs of maintaining exposure. The industry remained influential, but its prior record of generating excess returns proved difficult to sustain at scale.
Following the GFC, a related opportunity emerged. Banks tightened lending practices as they rebuilt their balance sheets and adapted to tighter regulation. This created a void in credit markets, as many strong companies struggled to obtain credit. Private credit fund managers rushed to fill the void. Early capital providers generated exceptional returns, which attracted followers. From 2005 to 2024, private credit AuM grew from less than $100 billion to $1.7 trillion in the United States alone (Figure 3).
Figure 3: Total U.S. Private Debt Assets Under Management ($ billions), 2000-2024
Sources: The Wall Street Journal, CION Investments, Prequin, KKR.
Today, private equity faces a fundamental challenge. Portfolio companies are increasingly difficult to sell at the values carried in fund portfolios. Public markets and strategic buyers are uninterested in supporting exits at current valuations. This has created a backlog of roughly 30,000 companies that remain stuck in aged portfolios.6
The private-equity model depends on realizations, as capital must be returned to investors to maintain revenue and make room for new fund launches. Continuation vehicles, interval funds, and evergreen structures have emerged as a solution to the backlog. These vehicles provide liquidity without reliance on traditional exits. Many also incorporate private credit exposure, further accelerating the growth of the newest and fastest-expanding segment of private markets.
More importantly, these structures weakened a critical constraint that once governed the industry. Historically, private-equity fundraising was restricted by realizations. Capital could not be raised indefinitely without exits. By recycling assets within a closed system and substituting liquidity mechanisms for true exits, that governor has been weakened. Fundraising is no longer tightly tied to realizations, allowing capital accumulation to continue even as exit conditions deteriorate.
Recommended Reading
4️⃣ Evergreen Fund Managers
“I strongly believe that unless we avoid these and other errors and false principles we shall inevitably go through a similar period of disaster and disgrace [as Barings Bank in 1890]. If such a period should come, the well-run trusts will suffer with the bad as they did in England forty years ago.”7
PAUL C. CABOT, founder of the first U.S. Mutual Fund (March 1929)
The most dangerous investment vehicle in the private markets supply chain is the evergreen fund. These vehicles are the final destination for aged private equity positions and direct or secondary purchases of private credit positions. Evergreen funds provide investors with exposure to these illiquid assets through structures that promise periodic liquidity. Given their placement at the end of the supply chain, they are packed with risk, yet they continue to accumulate assets at a breathtakingly rapid clip (Figure 4).
Figure 4: Growth of Evergreen Funds ($ Billions) (2015-2025E)
In many ways, evergreen funds are performing the function of a bad bank. In past financial crises, impaired or difficult-to-exit assets were carved out into separate vehicles so they could be worked out over time without forcing immediate loss recognition across the system. That is effectively what evergreen private market funds have become. They function like a mechanism for warehousing unresolved losses, delaying price discovery, and sustaining the appearance of attractive performance in a late-cycle environment.
Unlike traditional banks, however, evergreen funds perform these functions without being subjected to bank-level transparency, strict capital requirements, or liquidity regulation. Investors are often led to believe they are getting diversified portfolios of private equity and private credit positions; few fear that they are providing long-duration funding to absorb liquidity shortfalls generated elsewhere in the system. Instead, this reality is obscured by marketing language, structural complexity, and selective comparisons to traditional investment funds.
Few investors know that reported returns for these funds are often inflated by the recognition of large, one-day gains. Moreover, while liquidity is prominently advertised, it is highly conditional. Redemptions are limited to a small percentage of NAV (typically 5% per quarter) and subject to gates or suspension under even modest levels of stress. At the same time, investors bear an unusually heavy fee burden. Management fees at the fund level, incentive fees that are frequently assessed on unrealized gains, and layered fees from underlying managers can total in excess of 500 basis points. (Figure 5).
Figure 5: Estimated Layers of Fees for the Hamilton Lane Private Assets Fund
True believers who dismiss the possibility that the NAVs report
ted by these funds may not reflect the realizable value of the underlying assets may find little comfort in recent developments in public markets reported by people like Leyla Kunimoto and Jason Zweig. Faced with liquidity demands, a small number of funds have permitted investors to exit through public offerings. In each case, however, the public market proved unwilling to provide liquidity at valuations anywhere close to reported NAVs, revealing a meaningful gap between stated values and clearing price.8
Further Reading
5️⃣ Wealth Advisors
“These markets are the next frontier, full of boundless opportunities for Americans who want to save for a home, their children’s education, and their retirement. Our goal, is to help them seize those opportunities, so they can achieve their American Dream.”9
—ERIC J. PAN, President and CEO, Investment Company Institute (2025).
The final station in the private-markets supply chain is occupied by wealth advisors. It is also where the most aggressive sales activity can be observed.
Wealth advisors do not create private markets products, but they play a crucial role in distribution to retail investors. They deliver the message that lacking scale and access is no longer an impediment to investing in private markets. In this capacity, advisors serve as the last station before private markets truly exit the assembly line.
The incentives are straightforward. Private market products appear to offer higher expected returns, a differentiated narrative relative to competitors, and fee structures that can materially increase advisor revenue relative to traditional public market portfolios. Illiquidity can be reframed as protection against panicked selling; valuation opacity can be reframed as reduced volatility; and complexity can be reframed as a sign of sophistication. These features make private markets exceptionally attractive from a business development perspective, particularly in an environment where fee pressure on traditional advisory services is intensifying.
But unlike their clients, investment advisors are insulated from many of the risks. Performance is evaluated over long horizons; liquidity constraints can be attributed to product design rather than advice quality; and unfavorable performance can be explained way as a market feature rather than a lapse of judgement. On the other hand, asset growth is rewarded immediately. In combination, this creates a powerful incentive to allocate client capital in private market vehicles, often via evergreen funds.
The Amplifiers
It is difficult for a speculative supply chain to operate efficiently when skeptical opinions debunk marketing pitches. Voices of skepticism can extinguish exuberance and slow the speculative assembly line to a crawl. They are like rust on the gears of a conveyer belt.
This is why the most dangerous speculative supply chains are those in which all potential sources of skepticism are not merely muted, but are rather converted into vocal advocates. When a message laden with opportunity, inevitability, and safety is amplified simultaneously by multiple trusted intermediaries, the system acquires dangerous momentum. In the case of private markets, the key amplifiers are the trade media, trade associations, and even academia.
6️⃣ Trade Media
The trade media is among the most misunderstood participant in the private-markets ecosystem, largely because many readers fail to recognize that its role is structured for advocacy by design. Investors often operate under the naïve assumption that trade media exists primarily to report trends rather than to amplify them. In practice, however, members of the trade media are indirectly beholden to the industries they cover.
Trade publications, podcasts, and conference organizers typically depend on revenue generated from sponsorships, advertising, event attendance, and access journalism. These business models create powerful incentives to reinforce prevailing narratives rather than challenge them. Amplifying the status quo is commercially rewarded, while skepticism is not.
In 2025, private-market growth stories attract online attention, drive conference participation, and increase sponsorship demand. Skeptical coverage, by contrast, risks alienating advertisers and sources without offering comparable upside. It is therefore unsurprising that coverage emphasizes access, innovation, and growth while downplaying structural risks, conflicts of interest, and historical precedent.
Figure 7: Sample Private Markets Conference Agenda
Source: https://web.cvent.com/event/2672f251-eaba-4c86-b2a1-85237a639bd6/summary?RefId=2025PMPISite
The irony is that if the trade media openly acknowledged its structural bias, the resulting damage would likely be less severe. It is the misperception that no such bias exists that makes its influence especially pernicious.
7️⃣ Trade Associations
Trade associations exist to advocate for the commercial success of their members, but oftentimes they present themselves as if their mission lies elsewhere. Nevertheless, the greater the pressure that members apply to advocate for their interests, the more aggressive trade association messaging becomes.
Private market growth has clearly become a strategic priority for many companies operating throughout the investment supply chain, and relevant trade associations are responding accordingly. Policy statements, press releases, research reports, and public testimony increasingly frame expanded access as a clear benefit to investors rather than the companies selling the products.
One example that has risen in prominence recently is the Defined Contribution Alternatives Association (DCALTA). Their stated mission is to “help bridge the information gap on how to effectively incorporate non-traditional investments into defined contribution plans.” This may seem like an innocuous goal on the surface, but it should be viewed with caution. Listed below are the members and alliances of DCALTA.
Figure 8: DCALTA Members, Alliances, and Board Members
According to a recent report by With Intelligence, six of the ten firms on the list (shaded in red) rank among the top ten evergreen fund providers—and many more names are unranked evergreen fund managers.10 The thread running through this newsletter is that understanding the incentives of supply chain participants and amplifiers provide critically important context clues. The names on this list are key funding providers to DCALTA, which gives them a powerful voice in the content of educational materials and events.
8️⃣ Academia
“Many an academic is like the truffle hound, an animal so trained and bred for one narrow purpose that it is no good at anything else…when something was obvious in life but not easily demonstrable in certain kinds of easy- to-do, repeatable academic experiments, the truffle hounds of psychology very often missed it.”11
—CHARLIE MUNGER, former vice-chair of Berkshire Hathaway
Academia is often presumed to function as an unbiased voice of reason—producing research that is methodical and independent of commercial influence. But accepting this assumption at face value would be a mistake. Academic finance is populated by human beings, and no human on the planet is fully inoculated from incentives. Research agendas are shaped by funding sources, data availability, and institutional partnerships. Entire research centers are often supported by industry sponsors. Moreover, as Charlie Munger observed, academic research shows a structural preference for identifying narrowly bounded nuance within existing frameworks rather than challenging the foundational assumptions on which those frameworks rest.
Over the past year, some research emerging from well-regarded universities has raised important questions. In April 2025, Tim McGlinn of the AltView examined a study produced by the Georgetown University Center for Retirement Initiatives in partnership with Willis Towers Watson (WTW). The report, “Making the Case: The Effect of Private Market Assets on Retirement Income,” advocated for greater inclusion of private markets in retirement portfolios, yet relied on unusually aggressive return assumptions that have received limited critical scrutiny—and no response to his repeated requests for clarification.
More broadly, many universities and business schools have built substantial portions of their curricula, research agendas, and career pipelines around private markets. These programs educate students, place graduates, attract donor funding, and reinforce institutional relevance in an area of growing demand. All else equal, this creates a structural bias toward viewing private markets as durable innovations rather than as late-cycle phenomena.
In such an environment, it becomes difficult for academic institutions to conclude that private markets may be experiencing a bubble—much less that one may already exist.
Conclusion
“We knew the long boom in general and mortgage credit in particular exhibited all the classic signs of a mania, including the widespread belief that housing prices would never fall to earth…But we didn’t appreciate the extent to which non-banks were funding themselves in runnable ways.”12
—TIMOTHY GEITHNER, former Secretary of the Treasury (2014)
In the early 2000s, real estate speculators, loan originators, investment bankers, credit-default-swap issuers, and complacent members of the financial media erected a financial house of cards. The collective danger was hidden in small, incremental contributions made by millions of individuals acting in unison under the shared illusion that real estate prices could never decline on a national level. Not only was this assumption false—real estate prices had declined nationally in the 1810s, the 1830s, and the 1930s—but the very act of believing a decline was impossible made it more likely to occur. And it did.
In 2025, nearly everybody believes that private markets offer diversification benefits and return enhancement that will never deteriorate. In fact, the number of actors with nearly perfectly aligned incentives raises the question of whether the term “supply chain” is too innocuous. A more accurate analogy may be a rail gun—a weapon that uses perfectly aligned magnets to accelerate a solid projectile to velocities exceeding seven times the speed of sound. Anything in its path suffers devastating consequences.
The financial system has quietly assembled the equivalent of a financial rail gun, and the projectile has exited the barrel. It is uncertain when it will hit or how extensive the damage will be. But if you are a retail investor, it would be prudent to steer clear of its path.
The relentless sales pitches promising privileged access to private markets may make you feel attractive.
But make no mistake.
You’re not a magnet.
You’re a target.
