One of the most durable lessons in public investing is that trying to pick winners rarely pays. Decades of evidence show that low-cost index funds beat most active managers, and the sensible conclusion has been to stop choosing and simply buy the market.
It is good advice, and it is right, for public markets.
But it has quietly trained a generation of investors to believe that selection does not matter. In private markets, that belief is not just wrong. It is the single most expensive mistake an investor can make, because in private markets there is no average to buy.
The opportunity has moved
Before asking how to invest in private companies, it is worth asking why the question matters more than it used to. The answer is that the investable universe has quietly inverted. The number of US-listed operating companies has roughly halved since the late 1990s, even as the economy has grown enormously. Companies now stay private far longer and often never list at all: on one widely used estimate, the large majority of US companies above 100 million dollars in revenue are privately held.
At the same time, the public index that remains has become strikingly concentrated. The ten largest holdings now make up roughly 41 percent of the S&P 500, above the dot-com peak, and the effective number of stocks in the index has fallen to around its lowest in half a century. A portfolio built only from listed securities is therefore reaching a shrinking, and increasingly top-heavy, slice of the companies that actually drive the economy. The rest of it lives in private markets. As we argued in a previous note, by the time a company reaches its listing most of its value creation has already happened in private hands; the public investor arrives late by design.
In public markets, the average is enough
Here is why indexing works. In a large, liquid, heavily regulated public market, everyone sees the same price at the same moment and receives the same information under the same disclosure rules. Thousands of professionals compete to exploit any advantage, and in doing so they compete most of it away. The result is that the gap between a good and a bad manager is small.
The numbers make this concrete. Measured over ten years, the spread between a top-quartile and a bottom-quartile large-cap equity manager is only around three to four percentage points a year. That is a real difference, but it is narrow enough that, after fees, the index tends to win. When the penalty for choosing badly is small and the reward for choosing well is modest, the rational move is not to choose. Buy the average; the average is enough.
In private markets, the average is a myth
Now apply the same measurement to private markets, and the picture changes so completely that the public-market instinct becomes a liability. The same ten-year spread between top-quartile and bottom-quartile managers, which is three to four points in listed equities, is more than five times as wide in private equity: on the order of twenty percentage points a year. In venture capital it is wider still, and the bottom quartile has historically delivered negative returns while the top quartile compounded at high double digits.
Sit with what that means. The frequently cited outperformance of private equity over public markets is a top-line average, and that average is not an experience any single investor actually has. It is a blend of spectacular outcomes and poor ones. There is no index fund that delivers it, no way to buy private equity the way one buys the S&P 500.
What you earn is not the asset class; it is the specific set of managers and transactions you were able to access. In private markets, the average return is a statistical artefact. Nobody receives it.
Why the gap is so wide
The dispersion is not random, and understanding its source is what turns it from a warning into a strategy. In public markets, returns come from being right about a price that everyone can see. In private markets, returns come from three things that are not equally available to everyone, and that is precisely why outcomes diverge so violently.
The first is the illiquidity premium: the extra return paid for committing capital that cannot be withdrawn on demand.
The second is control and influence over how a company is actually run, which a minority holder of listed shares simply does not have.
The third, and the least visible, is information. In a listed company, information reaches shareholders by public announcement, on a schedule set by regulation. In a private company, it reaches shareholders by contract, through negotiated rights that vary from one transaction to the next. Two investors in the same private company can hold entirely different levels of insight into it.
Because these advantages are negotiated rather than posted, they accrue unevenly. The investor who reaches a transaction early, at a price they helped set, with contractual visibility into the business, is playing a different game from the one offered a pre-packaged slice once the terms are fixed.
That difference in access is the mechanism behind the dispersion. It is not that private markets reward risk-taking more; it is that they reward being genuinely on the inside, and punish being nominally exposed but structurally on the outside.
What this means for a private investor
None of this argues against indexing where indexing belongs. In public markets, low-cost and diversified remains the right default, and chasing star managers there is usually a tax on returns. The point is narrower and more important: the rules that make that true in public markets do not carry over to private ones, and applying them there quietly guarantees a mediocre outcome.
Three consequences follow.
1. You cannot buy the asset class, only a route into it.
There is no private-markets index to own. The published outperformance is an average no single investor earns. What you actually hold is a specific set of transactions, reached through a specific door.
The first question is therefore never whether to have private markets exposure, but through what access, and on what terms.
2. Access is the differentiator, not enthusiasm.
The returns that make the asset class famous accrue to those who reach transactions early, influence the price, and secure information rights.
Being offered a pre-set slice once terms are fixed is a structurally different, and usually worse, position than being in the room while a transaction is built.
3. Selection discipline is the return, not a formality.
When the spread between good and bad is twenty points rather than three, diligence stops being housekeeping and becomes the main source of return.
The consistency of top-quartile private managers means the work of selection compounds; the cost of skipping it compounds too, in the other direction.
The bottom line
The public-markets investor has been taught, correctly, that humility beats hubris: do not try to pick winners, buy the average. Carried into private markets, that same humility inverts into a trap, because there is no average on offer.
Private markets are where a growing majority of real economic value is now created, and the long-run return is real, but it is dispersed so widely between the best and the worst that the average is a number nobody actually earns.
The difference between the two comes down to access and selection rather than to the asset class itself.
The implication is not to admire private markets from the outside, nor to buy the first slice offered. It is to get genuine access, and to insist on the discipline that turns dispersion from a risk into an advantage.
