Skin in the Game: Why Expanding Retirement Capital into Private Markets Will Backfire

Human Nature Won’t Change From the earliest leveraged buyouts in the 1970s to today’s private credit boom, the pattern is consistent. Innovation leads to success. Success attracts capital. Capital dilutes discipline. Discipline eventually gives way to excess. Over the past several years, there’s been a growing push to expand access to private markets inside retirement plans, particularly 401(k)s. The pitch is simple, almost seductive: democratize access to private equity, private credit, and venture capital. Give everyday Americans a seat at the same table as institutions and the ultra-wealthy. Close the wealth gap. Let everyone participate in the upside. At first glance, it sounds like progress. But when you look closer, it starts to look like something else entirely. Yes, private markets have historically generated strong returns. Yes, the traditional 60/40 portfolio feels increasingly outdated in a world of persistent inflation and volatile public equities. And yes, the idea of broader access taps into something real. Namely, the frustration of being locked out of a system you feel is stacked against you. But beneath the surface lies a more fundamental issue: incentives. And perhaps more importantly, why now? The Illusion of Democratization We’ve heard this story before. Venture capital was “democratized.” Regulation opened the door for non-accredited investors to participate in startup investing and the narrative was the same: broaden access, share the upside, create wealth. So let’s ask a simple question: was true wealth created for these unaccredited investors? Not paper wealthy. Not marked-to-model wealthy. Actually liquid, realized wealth. They’re hard to find. You’d have a better chance spotting a crypto millionaire who cashed out at the right time. In other words stop searching for Waldo. The reality is that access alone doesn’t create outcomes. Structure does. Incentives do. Timing does. Information does. Which brings us to the concept that matters most: Skin in the game. When Skin Leaves the Game Historically, constraints mattered. Capital was scarce. Investors were sophisticated. Fund managers were accountable to a smaller, more informed base of limited partners. Now imagine removing that constraint. Imagine opening the floodgates of retirement capital — capital that is long-duration, relatively sticky, and often managed by individuals who don’t fully understand what they own. What happens?…The system changes. When capital becomes abundant and less discerning, underwriting standards tend to weaken. Assumptions stretch. Discipline erodes. Not immediately, but gradually…then suddenly Americans will be left with an empty bag. Before we can move forward let’s understand private credit from a 10k view. The Quiet Evolution of Private Equity and Credit Private equity began with a clear model: acquire companies, improve operations, and exit within 3–5 years. Returns were driven by operational discipline, strategic repositioning, and multiple expansion. But something changed. Holding periods extended. Exits became harder. Instead of selling to strategic buyers or going public, sponsors increasingly began selling to each other. Sponsor-to-sponsor transactions became the norm, not the exception. At the same time, private credit exploded and is now approaching roughly $1.8 trillion in assets. It filled a gap left by traditional banks post-financial crisis, offering speed and flexibility. But with growth came complacency. Underwriting became aggressive. Covenants weakened. Leverage increased. Structures became more complex, not more resilient. And when exits slowed, the system adapted…not by correcting, but by extending. Extend the loan. Amend and pretend. Layer in more capital. Push maturity. Reprice risk without fully realizing it. This is not innovation. Its a lazy system that is trying to innovate. The first thing an entrepreneur is told, gamble with someone else’s money. This is what private lenders have done and are now proposing to do with ordinary American’s life savings. But we have to revert to our street smarts. Said another way, “when the game is rigged, the invitation is the trap.” A Model Under Strain Let’s be honest about something rarely said out loud: If a fund manager is truly “crushing it” on a risk-adjusted basis, their first instinct is not to open the door wider and dilute returns. Scarcity is part of the value proposition. So when there is a broad push to bring in new, less sophisticated capital and retail retirement capital, no less, it raises a legitimate question: is this about opportunity… or necessity? Because the current system is showing signs of strain: - Exit multiples are under pressure - IPO markets are inconsistent - Sponsor-to-sponsor exits are recycling risk - Private credit portfolios are increasingly exposed to refinancing risk In other words, liquidity is tightening in a system built on long-duration assets and short-term assumptions. Given this misalignment, we are marketing to retirement savers, who cannot afford a misstep. Now to the pièce de résistance. Why Now? Because the opportunity is massive. Roughly $40 trillion sits in retirement accounts across the U.S. Today, the failed private credit market sits at $1.8 trillion. Even a small allocation shift represents trillions. This is not about inclusion. It’s about scale. The Risk to the Everyday Investor For the ordinary American, especially those already under financial pressure, the promise of higher returns is compelling. But the trade-offs are real: - Reduced liquidity when you may need it most (emergency healthcare bill, an unexpected child, hell car trouble or a flat tire!!) - Less transparency into underlying investments (imagine you invest a considerable portion of your life’s savings and then have no sight into the returns) - Exposure to assets that may be marked optimistically (everyone hates car salesmen. Sales people who still talk about a hypothetical return within an opaque asset class will frustrate you even more) Hopefully this isn’t too doom & gloom. Private markets have a role in fueling the American Dream — wealth for business owners and returns for savers. But access without understanding or aligned incentives is not empowerment, it breeds a failed result. A Final Thought There is nothing wrong with innovation. Nothing wrong with expanding opportunity. Nothing wrong with ambition. But there is something wrong with blindly entering a game while ignoring the incentives of the gamer. There is something wrong with widening the gap between those who make decisions and those who bear consequences. Most leaders today wear both suspenders and a belt, meanwhile, we’re supposed to trust them to take risks with our life savings? So the question isn’t whether you can invest in private markets. It’s whether you understand the game you’re entering and whether the people inviting you in are playing by the same rules. Because if they’re not, the outcome is predictable. And at that point, the real question becomes: Will you continue to accept it or will you demand better symmetry of the risks before you participate?