Why So Many Private Investors Lose Money
A 2024 Financial Analysts Journal study found 53–75% of private fund fees aren't performance-based. Why misaligned incentives, not risk, sink most private deals.
Andrew Davis
Founder, Equity Check
Why would an investment firm choose to make less money?
John Bogle, the man who started Vanguard, is an unwitting mentor of mine.
The core of his business model was to charge investors as little as possible. With that simple principle, Vanguard grew into the second-largest asset manager in the world. Over 50 million investors across 160+ countries have entrusted them with $11.6 trillion.
Simply by making less money — which is also the foundation of Equity Check's strategy.
Why do so many private investments lose money?
In my first private equity role, I sat in a capital-raising seat. I raised a lot of money ($500M+) and talked to a lot of investors (~2,000).
I developed relationships with many of those investors, and came to care about them and their families. I heard their stories — how they made their money, the businesses they started, the risks they took, and their dreams for the future. I invested with that company, and so did my family.
Many of those deals performed poorly, and a lot of people lost a lot of money.
This troubled me deeply. I couldn't bear that people had trusted me and had lost money. I thought I would never raise capital again, and that the financial world wasn't for me.
But a nagging question persisted. I felt strongly there was something for me to learn — and that if I simply wrote off the whole financial world as "that's not for me," I wouldn't learn what I was meant to learn.
That nagging question was how, and why, did this happen?
The leaders of the company were smart guys, we bought good properties in strong markets, and we had really impressive Excel spreadsheets — lots of them.
So what went wrong?
The answer that came to me — incentives.
Show me the incentive, and I'll show you the outcome.
Incentives are at the core of human behavior, and we all respond to them, mostly unawares.
Unfortunately, the financial services world is largely made up of bad incentives. Moral hazard is the strongest way to say it — when one party takes the risk and another pays for it.
Those incentives take the form of fees:
- Acquisition fees
- Asset management fees
- Property management fees
- Construction & development fees
- Refinancing fees
- Disposition fees
- Loan guarantee fees
- Marketing, administrative & affiliate fees
The vast majority of the financial services world — be it traditional stock-market investing, retirement planning, or private investments — is a fee-extraction machine.
John Bogle put it succinctly — too much cost, not enough value.
Are private investment fees tied to performance?
My experience wasn't the exception, it was the rule — investors lose money, and the sponsors get rich.
The standard structure incentivizes activity and asset gathering, not performance. To turn Munger's quote into a formula:
When every acquisition is a 6-, 7-, or 8-figure payday for the sponsor — and an addition to their assets under management, meaning more fee income — that's a powerful incentive to acquire more assets, regardless of whether they're good investments.
This is how and why a lot of people lost a lot of money. Sponsors doing bad deals, buying properties at the top of the market, with risky debt, cherry-picking the data that supported their decision, and blaming the market or the Fed when investors lose money.
This is motivated reasoning: the desired conclusion comes first, and the evidence-gathering bends to fit it. Munger called it incentive-caused bias — the idea that your incentives don't just change what you do, they change what you genuinely believe is true.
What does an aligned investment sponsor look like?
When the why became clear, I asked one of my favorite questions.
To make it concrete, what if I inverted the ratio — from 75% non-performance / 25% performance to 25% non-performance / 75% performance? And, since I love the 80/20 rule, for good measure: 20% non-performance / 80% performance.
Flip the incentive, flip the outcome
The share of a sponsor's pay tied to investor performance, under the standard fee structure versus an inverted one — and what one aligned operator actually does.
| Year | Performance-based share of sponsor pay |
|---|---|
| Industry standard | 25% |
| Inverted | 75% |
| 80/20 rule | 80% |
| Aligned operator | 95% |
What would the results be?
At first, every offering I reviewed was disqualified on this standard alone. I thought maybe I was too idealistic, or had gotten the answer wrong.
Then I had the good fortune of being introduced to a multifamily operator with a 27-year track record. One of the first things they shared was their manifesto, called "Incentives & Biases." They had thought deeply about incentives in investing and built their entire company on this principle. They started in 1999 and had completed over 80 round-trip deals — buying, improving, operating, and selling — so there was plenty of data.
I had a real case study in whether "doing the opposite" results in different outcomes. Their ratio — 95% performance / 5% non-performance.
- Average IRR over 27 years
- 18.5%
- Investments completed
- 100+
- Investor capital lost to date
- Zero
Average IRR over 27 years
Investments completed
Investor capital lost to date
Some characteristics:
- They consistently rank among the top property-management companies in the country in tenant satisfaction and retention.
- They have a former central-bank chief economist on staff who publishes 150-page quarterly research reports, used internally to guide decisions and shared externally with investors.
- They're obsessed with avoiding risk. A 70-person team of engineers, data scientists, and ML/AI PhDs runs predictive analytics, mathematical optimization, and insurance-grade climate modeling to screen deals, drive occupancy and rent growth, and stress-test every asset.
Their philosophy, summed up in a single sentence — growth does not drive excellence, excellence drives growth.
Instead of incentive-caused bias, they have incentive-caused clarity: the same bias that makes the fee-driven sponsor believe a bad deal is good makes the aligned sponsor believe a marginal deal is too risky to touch.
Are private investments riskier than the stock market?
This inversion changed everything for me. There is risk in everything; investing is not exempt. To put my head in the sand — or to pretend that index-fund investing, hiring a financial advisor, or putting it all in gold carries no risk — was lazy thinking.
The question is not "is there risk," but how well are you avoiding it. And investing with people who are incentivized to avoid risk is a great place to start.
This simple principle is at the core of Equity Check. I proudly represent sponsors whose incentive structure places investor interests first.
Work with aligned sponsors
Equity Check works with a small group of aligned sponsors whose pay is weighted toward your returns. Request access to the investor list.
Frequently Asked Questions
Why do private equity investors lose money?
Because most fund fees reward sponsors for acquiring and holding assets, not for performance. When every acquisition triggers a fee regardless of outcome, sponsors are incentivized to keep buying, even at the top of the market. The losses follow the incentives.
What percentage of private equity fees are not tied to performance?
A 2024 Financial Analysts Journal study of 10,791 private capital funds found 53% to 75% of fees are non-performance-related, charged whether or not investors make money.
What is moral hazard in private investing?
Moral hazard is when one party takes the risk and another pays for it. In private investments, sponsors often collect fixed fees on acquisition, management, and disposition while investors bear the downside if the deal underperforms.
Are private investments riskier than public markets?
Not inherently. Private investments become risky through poor incentive structures and lack of diversification, not because the asset class itself is more dangerous. Index funds, advisors, and gold all carry risk too. The real question is how well that risk is being managed.
What does incentive alignment mean for investors?
It means the sponsor only makes meaningful money when investors do. Aligned sponsors tie the bulk of their compensation to performance rather than to fixed fees, so their financial interest matches the investor's.
What is Equity Check's investment philosophy?
Equity Check works only with sponsors whose compensation is weighted toward investor returns rather than fixed fees. The firm earns less in fees by design, prioritizing alignment over fee income.
- Private Equity
- Incentive Alignment
- Investor Education
- Fee Structures
