This post distills key insights from Mark Higgins’ recent Substack article, “https://finhistory.substack.com/p/incentives-are-dangerously-aligned,” and applies them to the realities facing Canadian investors today.
Why This Matters
Private markets—especially evergreen and semi-liquid funds—are booming. But beneath the surface, structural conditions eerily resemble those that preceded past financial crises. Higgins identifies three warning signs:
- Risk segmentation across a long, opaque supply chain.
- Near-perfect incentive alignment among participants to keep the machine running.
- A flawed universal assumption: that private markets will always deliver diversification and superior returns.
These dynamics don’t point to “bad actors.” They point to millions of rational decisions that collectively amplify systemic risk. Retail investors, positioned at the end of this chain, are most exposed when stress hits.
The Speculative Supply Chain Explained
Think of private markets as an assembly line:
- Institutional Allocators: Increased allocations to alternatives became self-reinforcing. Career risk now discourages simplification.
- Investment Consultants: Originally independent performance reporters, now portfolio architects—yet still claiming neutrality. Complexity sustains fees.
- Private Equity & Credit Managers: Facing exit bottlenecks, they recycle assets into continuation vehicles and evergreen funds, weakening historical constraints.
- Evergreen Funds: Function like “bad banks,” warehousing illiquid assets and delaying price discovery. Liquidity is conditional, fees are layered, and NAVs may not reflect realizable value.
- Wealth Advisors: Reframe illiquidity as discipline, opacity as stability, and complexity as sophistication—creating compelling sales narratives.
Amplifiers That Magnify Risk
- Trade Media: Dependent on sponsorships and conferences, reinforcing growth narratives over skepticism.
- Trade Associations: Advocate for member success under the guise of investor education.
- Academia: Research agendas and career pipelines often aligned with private market growth, limiting critical scrutiny.
Red Flags for Investors
Before allocating to private markets, ask:
- Liquidity: What are the true redemption terms? How did similar funds behave under stress?
- Valuation: How are NAVs calculated? What’s the realized vs. unrealized contribution to returns?
- Fees: What’s the full fee stack—including incentive fees on unrealized gains?
- Exit Dependence: How much exposure is to continuation or evergreen structures versus true realizations?
- Governance: Are there pre-committed triggers to reduce exposure when discounts or gates appear?
Bottom Line
The belief that private markets offer permanent diversification and superior returns is today’s flawed assumption. Evergreen and semi-liquid funds are not innovations—they are late-cycle mechanisms that warehouse risk and delay price discovery. If you’re a retail investor, don’t stand in front of the financial rail gun.
