Risks & Costs

Liquidity is the ability to turn an investment back into money at a fair price, quickly. In private markets it is scarce by construction — and its scarcity is the least intuitive risk here because it costs nothing until the day it costs everything.

Know the vocabulary of the ways out. A lockup forbids redemption for a period. A notice period means requesting months ahead. A gate caps how much the fund will redeem per period — so in a rush for the exits you get a fraction per quarter. A suspension stops redemptions entirely, legally, if the documents allow it — and they almost always do. None of these are scandals; all of them are printed in advance.

The pattern to internalize: liquidity vanishes exactly when it's most wanted. Funds gate when assets are hard to sell; assets are hard to sell when markets are stressed; markets are stressed when you, too, want your money. The document terms are the weather forecast for that day.

Price the risk before investing: match every private dollar to money you won't need for the deal's full realistic life — then add slack, because “realistic life” routinely runs past the projection.

A public share's price is set by continuous auction. A private investment's stated value is produced by a process — someone applies a method, on a schedule, and a number appears on your statement. The number can be honest and careful, and still be wrong.

Questions that define the quality of that process: Who values? (the manager, or an independent party?) How often? (monthly, quarterly, annually?) By what method? (recent transactions, appraisals, models?) Who checks? (an auditor — which one, and did they qualify their opinion?)

Understand smoothing: infrequently valued assets show gentle, steady lines not because the underlying values are calm but because nobody re-marks them daily. Part of the “low volatility” attributed to private assets is real economics; part is the absence of a thermometer. The distinction matters most when you plan to rely on stated values — for redemptions, for borrowing, for your own sense of wealth.

The practical failure mode: values hold up on paper until a forced event — a sale, a redemption run, an audit — collapses the stated number into a market number. The gap between the two was the risk all along.

Private-market fees come in layers, and only the total matters. The recurring cast:

• Management fee — typically 1–2% yearly, sometimes charged on committed rather than invested capital (you pay on money not yet deployed).
• Performance fee / carried interest — a share of profits, shaped by its hurdle (the return that must be cleared first) and high-water mark (whether past losses must be recovered before it's charged again).
• Sales commissions — paid to the dealer at purchase, sometimes trailing annually; in the exempt market these can be large and are disclosable on request.
• Fund expenses — audit, legal, admin, often charged to the fund on top of the management fee.
• Underlying-layer fees — funds of funds and “feeder” structures stack a second full fee layer beneath the first.

The honest arithmetic: total annual costs of 3–5% are not unusual once layers stack. At 4%, an investment must earn 4% just to break even — every year — before you earn anything. Compounded over a decade, that's a substantial share of the outcome redirected regardless of results.

Ask for the total in dollars: “On a $50,000 investment held seven years with mid-case performance, how many dollars in total do all parties collect in fees and commissions?” The quality of the answer is itself diligence information.

Leverage is borrowed money layered onto an investment, and it amplifies symmetrically: a property bought with 75% debt turns a 10% price rise into roughly 40% on your equity — and a 25% price fall into zero. Most private-market catastrophes are ordinary downturns times leverage.

It hides in more places than the pitch deck mentions: inside the buildings (mortgages), inside portfolio companies (buyout debt), at the fund level (subscription and margin lines), inside instruments themselves (futures, derivatives), and occasionally in you, when someone suggests borrowing to invest — the one layer entirely within your control and the first to refuse.

Leverage also converts drawdowns into forced selling: lenders and margin rules can compel sales at the bottom, turning temporary declines into permanent losses. An unleveraged investor can wait out a bad year; a leveraged one may not be given the choice.

Questions to ask of any offering: total debt at every layer as a share of assets? At what rates, maturing when? What happens on a covenant breach? Who besides you can force a sale, and when?

Every risk so far lives in the deal. This one lives in your decisions: how much of your total financial life rides on a single private outcome. Exempt-market losses, when they come, are usually total — which makes position sizing the closest thing this market has to a seatbelt.

Concentration compounds quietly along familiar paths: the first cheque goes well, so a second follows into the same fund; the same promoter offers the “next” deal; a community's favourite investment absorbs a family's savings one top-up at a time. Each step feels like conviction; the sum is fragility.

Watch for correlated concentration too: three different investments that all depend on one city's real estate market, one industry, or one promoter's honesty are closer to one investment than three. Diversification is measured in independent failure modes, not line items.

The regulators' OM-exemption caps (covered in The Exemptions) encode a view worth respecting: for ordinary investors, exposure to any one exempt product measured in the low tens of thousands is where the line was drawn after watching real outcomes. Your own line may reasonably be tighter.

Most private investments are legitimate. But the exempt market's features — less disclosure, no daily pricing, relationship-driven sales — are exactly the habitat fraud prefers, and fraud losses are the least recoverable kind. The patterns repeat with remarkable fidelity:

• Guaranteed or impossibly steady returns. Real 1% monthly, every month, does not exist; ledgers producing it are being written backwards from the promise.
• Unregistered sellers — the single most reliable marker. Real opportunities almost never require an unlicensed stranger.
• Affinity leverage: schemes travelling through churches, cultural communities and friend groups, where trust substitutes for verification.
• Urgency and secrecy: closing Friday, don't tell your accountant, wire today.
• Payment anomalies: e-transfers to individuals, crypto “for speed,” cheques to entities not named in any document.
• Redemption friction as first symptom: paid distributions suddenly “processing” — often the first public crack in a Ponzi structure.

Your defences are boring and near-absolute: verify registration (the walkthrough), verify that the auditor and custodian exist and engage with the fund, never pay outside documented channels, and treat pressure itself as disqualifying. Fraud needs speed and isolation; diligence denies it both.