Over the past five years, the hottest investments have all had the word ‘private’ in front of them: private equity, private credit, and private real estate.

Private investments, or ‘privates’ as they are colloquially known, buy whole companies or properties or make direct loans to companies. When they buy companies or properties, the private fund managers can change management, business strategy, capital structure, or anything else that will allow them to sell the business or property for a higher price later.

The private fund managers are 100 percent in control, unlike when a manager buys a publicly traded stock. Even a very large shareholder in a public company probably has a small stake, and while they can complain to management, get a board seat, or otherwise agitate for change, the publicly traded company management is still in control.

Private managers often use a fair amount of leverage to improve their returns. And, they can often use more leverage than managers that hold publicly traded stocks because the investments aren’t valued each day by other investors. Private investments are valued periodically by third parties hired by the managers in a process called ‘marking to market.’

Those infrequent ‘marks’ mean that private investments typically don’t appear very volatile, unlike public market securities. I wrote an entire article about this, which you can find here since it related to a private credit investment that I made that subsequently went public.

As I’ve said before, I invest in new (and frequently odd) things that we don’t use currently for clients so that I can learn about them. I consider it R&D without putting any client money at risk.

And it makes me pay attention in a very different way since my own money is on the line. I typically hold these things for years, and it allows me to understand what’s going on and ask many questions. It took me three years to figure out what was wrong with a private equity interval fund a few years ago that I wouldn’t have understood without putting my own money in.

I like to say that we eat our own cooking, and my account is the test kitchen – sometimes something is delicious, and we can serve it to everyone, and sometimes it’s awful, and I’m the only one choking in the back.

Last week, I had a pretty sour taste in my mouth because the largest private real estate fund ‘gated’ its fund, which means that investors have limited access to their money.

The fact that the fund could put up gates is well disclosed in their documents and not surprising. In fact, it’s a welcome feature of a fund like this because if everyone could sell their investment in the fund anytime, it could force the fund managers to sell the underlying assets in a fire sale.

That doesn’t happen much in public market funds because the market is so big. But if you have to unload a student housing complex or series of logistics centers overnight and everyone knows you’re a forced seller, the price gets knocked down, hurting all of the investors.

In my case, the fund is in a retirement account that I can’t access for a decade anyway, so I don’t need the money anytime soon. But I can’t help but wonder what the gate will do to my investment.

In theory, the underlying assets are as good as they were before the gate went up, but will the gate create a lot of unnecessary selling pressure? Will the manager have to liquidate assets creating capital gains for taxable investors (as noted, I have it in a retirement account, so it doesn’t matter to me)?

Well, I have a front-row seat, and when someone asks me about private investments, I can tell them from first-hand experience what can happen in good times and in bad.

Given how much the fund has grown in the last five years, I think a lot of advisors will be having some very uncomfortable conversations with their clients. I’m happy that I don’t have to do that since this year was hard enough in the public markets.

In the end, I think these funds will be fine, but I’m happy that Acropolis doesn’t do private investments. There were times in the last year or two when I wondered if we should, but this is a good reminder that there are enough risks to investing without sudden illiquidity.

I don’t think private investments are bad, but I wonder whether people really understand that you don’t always have access to your money. It’s one thing to say it when everything is fine, but it’s another thing when it happens to you.