Private equity has always been the VIP room of investing. Big institutions got in. You didn't. Now the velvet rope is coming down. From 6 April, the FCA has given the green light to make long-term asset funds eligible for stocks and shares ISAs. But should you add private equity to your ISA?
Schroders and Hargreaves Lansdown have already partnered to list the first on a major retail platform. The government, keen to channel household savings into the real economy, is backing the push. Ordinary investors, we're told, can finally share in returns once reserved for the wealthy.
It sounds good. But two recent papers – Ludovic Phalippou at Oxford Saïd and Nori Gerardo Lietz at Harvard Business School – take it apart. What's being democratised, they argue, isn't the upside. It's the cost, the complexity and the risk.
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So, should you add private equity to your stocks and shares ISA?
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Will private equity in my ISA see strong returns?
The case for private equity rests on one claim: superior returns for your ISA. The numbers behind that claim don't hold up.
Take the industry's favourite metric, the internal rate of return (IRR). Phalippou shows it doesn't measure what most people think.
Investment firm KKR reported a gross IRR since inception of roughly 25.5% across 18 consecutive annual filings. Sounds extraordinary. But IRR tracks the timing of cash moving in and out of a fund, not the rate at which your wealth compounds. If you treated that 25.5% as a compound annual return, you'd arrive at what Phalippou calls 'implausibly large' terminal wealth. A number built to impress, not inform.
Compare private equity against public markets on a like-for-like basis and the picture shifts. Lietz matches the actual cash flows of private equity funds against equivalent investments in the S&P 500 using Pitchbook's public market equivalent methodology.
Over the past 15 years, private equity's edge has vanished – for the trailing five years, it's negative at -4.62%. The premium that justified the whole exercise no longer exists.
You can't fix this by picking better managers. Performance persistence among buyout funds has disappeared for vintages after 2000. Sort managers into quartiles at fundraising and there's no significant difference in final outcomes. The idea that a retail platform will consistently spot the winners is a fantasy.
Where does the money really go when you invest in private equity?
Even if private equity delivered the returns its marketing promises, fees would eat most of them before they reached you.
Phalippou calculates that standard institutional private equity fees already consume about 7% of returns annually: management charges, performance fees and the portfolio-company costs that rarely appear in headline figures. Retail wrappers add roughly another three percentage points for distribution, platform and oversight. The Schroders Capital Global Private Equity LTAF, one of the first products heading for ISA shelves, carries wrapper charges exceeding 2% a year. That's before the underlying fund costs.
Lietz's fund-of-funds data is the closest preview of what retail buyers will actually experience, since platforms and target-date managers add a comparable fee layer. The result: consistent underperformance, with a return multiple below 1.0 across nearly every period she examined.
Then there are the valuations. In traditional private equity, a questionable net asset value (NAV) was an accounting curiosity. In open-ended retail funds, investors buy and sell at reported net asset values, so every mark has direct cash consequences.
In 2024, Hamilton Lane's retail fund bought private equity stakes at roughly 80% of stated NAV and marked them to 100% the next day. That's not a rounding error. It's a wealth transfer from incoming investors to existing holders, booked as a gain.
LTAFs work the same way. Valuations are monthly. Redemption notice periods run to at least 90 days. Buy in at an optimistic mark and you can't get out fast; worse, you may be subsidising someone else's exit.
The Woodford echo
We've been here before. The Woodford Equity Income fund didn't collapse because one manager made bad calls. It collapsed because the structure was unsound: illiquid assets inside a vehicle promising daily dealing. Ordinary savers bore the full cost – see our article on how Woodford investors are suing Hargreaves Lansdown.
LTAFs are better designed. The notice period exists to prevent a run. But the deeper tension hasn't gone away. The Financial Conduct Authority classifies these funds as 'restricted mass market investments', yet the new targeted support regime lets platforms actively nudge savers toward them. And from April 2027, under-65s will be capped at £12,000 in a cash ISA, pushing anyone who wants to use their full £20,000 allowance toward investment products. The alternatives are being narrowed at the same time as the risks are being widened. Phalippou's verdict: litigation is 'not merely possible but predictable'.
A simpler route to private equity exposure
If you want exposure to private equity's economics, there's a cheaper and more liquid option.
Lietz found that a basket of publicly listed private equity firms comfortably outperformed their own flagship private funds.
In the trailing five years to December 2024, US-listed private equity stocks beat their firms' private vehicles by an average of 23%. You get transparent pricing, daily liquidity and full exposure to the management fees, carried interest and asset growth that drive private equity profits.
Put simply, the best way to profit from private equity is to skip the expensive products and buy the companies selling them.
If a platform does offer you an LTAF in your ISA this spring, ask three questions before committing. What is the total annual cost across all layers? What are the redemption terms in a stress scenario? And who values the fund? If you can't get straight answers, that tells you everything you need to know.
The VIP room is opening its doors. Check what the drinks cost before you walk in.
