The movement to open U.S. retirement plans to private equity and venture capital is gaining momentum.

On the surface, the pitch is compelling. Proponents argue that including these asset classes in 401(k)s will democratize access to investments that endowments and pension funds have long dominated.

They say that private equity has delivered strong returns, particularly among top-tier funds, and that allowing ordinary savers to invest will provide diversification, dampen volatility, and give them exposure to companies that would otherwise be unavailable in the public markets.

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It sounds promising, but history and hard data tell a different story. Jeffrey Hooke of Johns Hopkins Carey Business School has been blunt in his warnings. He has noted that, for the most part, private equity funds do not outperform the stock market once fees and risk are accounted for. He argues that the structure is illiquid, the fees are very high, and that it is not a good investment for the rank‑and‑file saver.

Brian Payne of BCA Research goes further, calling the push into retirement accounts an "exit ramp" for private equity firms that are finding it increasingly difficult to cash out through IPOs or strategic sales.

However, there is a way to achieve the kind of returns that private equity promises in your 401(k) without the associated fees.

Private equity's fee problem cannot be overstated. Index funds charge a few basis points, while private equity still operates under its notorious "2 and 20" fee structure, 2% of assets under management plus 20% of profits.

Barry Ritholtz and Prince Dykes have criticized the industry's talk of democratization as little more than clever marketing designed to funnel middle‑class savers into high‑fee, opaque investments that steadily erode their returns.

Liquidity is another major obstacle. Retirement plans are designed to be flexible. Workers may change jobs, rebalance portfolios, or access hardship withdrawals. Private equity funds, by contrast, typically lock up money for seven to twelve years.

That structure may work for institutional investors with deep pockets and long time horizons, but it is ill‑suited to the needs of individual investors.

The research evidence backs up these warnings. Antti Ilmanen and his team at AQR, in their study “Demystifying Illiquid Assets,” found that private equity's vaunted outperformance has been shrinking for two decades.

When compared to leveraged small‑cap benchmarks that better reflect its risk profile, private equity's edge all but disappears. Since 2006, the supposed outperformance has evaporated entirely.

Verdad Capital's analysis of London‑listed private equity funds reinforces the point. While official NAVs reported volatility of around 14%, the actual market-traded shares swung closer to 24%, which is well above the broader market.

Investors were not fooled; they demanded a 30% discount to NAV, a clear signal that the reported valuations could not be trusted.

None of this should come as a surprise.

Wall Street has a long history of pitching "exclusive" products to retail investors with disastrous results.

In the 1980s, limited partnerships promised access to real estate and oil and gas investments. Investors paid high fees, faced long lockups, and often found themselves holding worthless paper once the tax advantages evaporated.

High‑fee variable annuities were marketed as a way to combine market exposure with guaranteed income, but the multiple layers of mortality charges, rider costs, and underlying fund expenses often topped 3% a year, leaving many annuity holders worse off than if they had simply owned an index fund.

The most attractive sales points of these insurance products had an unfortunate downside. You must die for them to kick in.

The 1990s and early 2000s brought waves of structured products such as principal‑protected notes and market‑linked CDs. These promised sophisticated downside protection but delivered mediocre returns and high commissions.

Most disappeared quietly after the financial crisis exposed their weaknesses.

More recently, non‑traded REITs were sold as a way to gain exposure to real estate's steady cash flows. In practice, investors were locked up for years, paid steep sales loads, and saw their "stable" NAVs collapse when properties were reappraised.

Private equity in retirement accounts appears poised to follow the same pattern. The marketing is slick, the promise alluring, but the outcomes for ordinary investors are likely to be poor.

The irony is that the very economic drivers behind private equity's returns, small size, value orientation and leverage, can be accessed more efficiently in the public markets. Erik Stafford of Harvard Business School, in his study “Replicating Private Equity,” demonstrated that a rules‑based portfolio of small, inexpensive public companies with modest leverage can closely replicate the pre‑fee returns of private equity funds.

Brian Chingono and Daniel Rasmussen extended the analysis in their work “Leveraged Small Value Equities.” They built annual portfolios of the 25 most attractive small‑cap value stocks, emphasizing companies with improving fundamentals and declining debt. The results were remarkable: average annual returns of 25%, a Sharpe ratio of 0.51, and a CAPM alpha of nearly 10% per year. Even after controlling for established risk factors such as size, value, momentum, and liquidity, the strategy delivered consistent double‑digit outperformance.

The tradeoff with these replication strategies is volatility. Unlike private equity, which smooths its reported returns with infrequent valuations, public‑market strategies reveal their swings in real time. Betas often run between 1.5 and 2.0, and drawdowns can approach 60% in a crisis.

However, the economics are real, the fees are a fraction of what private equity charges, and the liquidity is always there when needed.

History is clear. Whether it was limited partnerships in the 1980s, high‑fee variable annuities, structured products in the 1990s, or non‑traded REITs in the 2000s, every so‑called democratization push has followed the same pattern.

The marketing promised sophistication and superior returns, but the ones who benefited were the managers and brokers, not the investors. The current push to allow private equity into retirement accounts is no different. For most savers, it will mean high fees, illiquidity, and opaque valuations.

The lesson is straightforward. If you want the economic exposure that private equity offers, you can get it through disciplined, transparent small‑cap strategies in the public markets without locking up your capital for a decade and without handing over 6% a year in fees.

The mirage of stable returns may appear comforting on paper, but ultimately, it is the managers who will profit, not the investors.

The magic bullet of investing is not allowing you to use a private equity fund, investing in pie-in-the-sky startups, or finding some magic chart pattern.

It is using small-cap leverage, valuation, and common sense to recreate the strategies of the top-tier PE firms without giving up liquidity or paying huge fees.

Here are five small-cap stocks that are actively repaying debt and would be worth considering for a small-cap deep value with debt-reduction portfolio:

MediaAlpha MAX operates an insurance customer acquisition platform in the United States through its technology platform that facilitates insurance carriers and distributors in targeting and acquiring customers across property and casualty insurance, health insurance, and life insurance verticals. The company reported exceptional Q1 2025 financial results with revenue surging 109% to $264.3 million and Transaction Value growing 116% to $473.1 million, driven primarily by strong performance in its Property & Casualty insurance vertical. MediaAlpha’s programmatic customer acquisition platform connects leading insurance carriers with high-intent shoppers, benefiting from the recovery in auto insurance markets and carriers’ transition to digital direct-to-consumer distribution models.

American Axle & Manufacturing Holdings AXL designs, engineers, and manufactures driveline and metal forming technologies that support electric, hybrid, and internal combustion vehicles through two segments: Driveline and Metal Forming. The Driveline segment offers front and rear axles, driveshafts, differential assemblies, clutch modules, balance shaft systems, disconnecting driveline technology, and electric and hybrid driveline products for light trucks, SUVs, crossover vehicles, passenger cars, and commercial vehicles. The company is navigating the automotive industry’s transition to electrification while maintaining relationships with major OEMs like GM and Stellantis. Recent agreements with Scout Motors for electric drive units demonstrate the company’s strategic positioning in the EV market transition.

Bloomin’ Brands BLMN owns and operates casual, polished casual, and fine dining restaurants in the United States and internationally through U.S. and International Franchise segments, with a restaurant portfolio including four concepts: Outback Steakhouse (casual steakhouse), Carrabba’s Italian Grill (authentic Italian cuisine), Bonefish Grill, and Fleming’s Prime Steakhouse & Wine Bar (contemporary steakhouse). Recent Q2 2025 results showed EPS of $0.29 with restaurant margins declining, reflecting ongoing challenges in the casual dining sector. The company continues to focus on operational improvements and consistency of execution while navigating macroeconomic pressures affecting consumer dining habits. Recent leadership changes and strategic initiatives aim to revitalize the Outback brand and drive sustainable, profitable growth.

The E.W. Scripps Company SSP is a diversified media company focused on creating a better-informed world, operating through its Local Media and Scripps Networks segments. As one of the nation’s largest local TV broadcasters, it serves communities with quality journalism through a portfolio of more than 60 television stations in over 40 markets. The company reaches households across the U.S. with national news outlets Scripps News and Court TV, and popular entertainment brands including ION, Bounce, Defy TV, Grit, ION Mystery and Laff, making it the nation’s largest holder of broadcast spectrum. Founded in 1878 with the longtime motto “Give light and the people will find their own way,” Scripps serves as the steward of the Scripps National Spelling Bee and has been expanding into sports broadcasting with agreements for NHL teams and WNBA coverage. Recent Q1 2025 results showed revenue of $524 million (down 6.6% YoY) but improved margins in the Scripps Networks segment due to connected TV revenue growth and cost savings initiatives.

NexPoint Real Estate Finance NREF is an externally managed commercial mortgage real estate investment trust (REIT) with shares listed on the New York Stock Exchange under “NREF,” primarily focused on investments in real estate sectors where its senior management team has operating expertise, including multifamily, single-family rental, self-storage, life science, hospitality and office sectors. NREF’s strategy involves originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties and common stock investments, as well as multifamily commercial mortgage-backed securities securitizations. The company targets stabilized properties or those with “light transitional” business plans, focusing on the top 50 metropolitan statistical areas while maintaining expertise in specialized real estate sectors.

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