Private Market Fees May Hinder Mainstream Adoption, Morningstar CEO Says

In Brief:

The convergence of public and private markets is accelerating, but fees in semi-liquid private market vehicles are currently three times higher than typical mutual funds—creating a steep hurdle that threatens widespread adoption. Kunal Kapoor, CEO of Morningstar, warns that without dramatic fee compression, the industry's mainstream ambitions will stall despite growing investor interest. Speaking on the Alt Goes Mainstream podcast, recorded live at Morningstar's Investment Conference in Chicago, Kapoor brought a unique perspective from nearly three decades at the firm, starting as a data analyst pulling fax sheets and rising to lead the company that provides critical investment research and fund ratings to millions of investors.

Big Picture Drivers:

• Market Structure Evolution: Traditional barriers between public and private markets are dissolving as new vehicle types emerge

• Cost Transparency Crisis: Fee structures in private markets lack standardization, making investor comparison nearly impossible

• Demographic Shift: Younger investors have greater comfort with private market concepts through workplace exposure to PE-backed companies

• Regulatory Convergence: Industry needs common documentation standards similar to public markets to enable mainstream adoption

Key Themes:

• Fee Structure Transformation: Private markets must standardize total expense ratios and dramatically reduce costs from current levels that are three times higher than mutual funds, with competitive forces from major asset managers like Vanguard driving inevitable compression.

• Vehicle Innovation Evolution: New structures like interval funds and ETF partnerships between traditional asset managers and private market firms are testing whether liquidity can be added to private investments without sacrificing returns.

• Investor Sophistication Reality: Retail investors demonstrate more discipline and long-term thinking than institutional assumptions suggest, with younger generations bringing comfort with private market concepts through workplace exposure to PE-backed companies.

• Market Convergence Acceleration: The distinction between public and private investing is blurring as the "haystack" of total market opportunity increasingly includes private companies, requiring new approaches to portfolio construction and benchmarking.

Key Insights:

• Fee Compression Inevitable: Just as index funds drove down costs in public markets, major players like Vanguard and Capital Group entering private markets will force dramatic fee reductions through competition rather than regulation.

• Liquidity Premium Overvalued: The excess returns in private markets may not actually come from illiquidity premiums but from origination capabilities, suggesting liquid private market vehicles won't sacrifice performance.

• Diversification Benefits Declining: Correlations between public and private markets are likely higher than expected, reducing the diversification argument for private market investments.

• Individual Investors Underestimated: Retail investors are actually quite sophisticated and sticky with their investments, contrary to Wall Street assumptions about their emotional decision-making.

• Time Horizon Trumps Strategy: The most successful investment approach across both public and private markets is simply holding quality investments for extended periods rather than trading around market cycles.

• Transparency Revolution Coming: Private markets will follow the same path as public markets, evolving from secretive to transparent as investor demand and regulatory pressure mount.

Memorable Quotes:

• "If we can deliver a simple total cost, that is probably the easiest thing to do." - Kunal Kapoor, explaining the first step needed to make private markets more accessible to mainstream investors

• "There's no doubt that the convergence of public and private is accelerating. And the question is how far it goes and how quickly it moves." - Kunal Kapoor, on the fundamental market shift currently underway

• "We're here for the investor. And that often means we take positions that piss off the industry." - Kunal Kapoor, describing Morningstar's independent stance that has driven fee compression in public markets

• "I think the skeptic would, I think, rightly say that partly they exist because there's some FOMO there." - Kunal Kapoor, on why private equity firms are creating evergreen fund structures after watching companies they sold continue to compound

• "In Bogle's words if you're going to own the haystack probably the most compelling thing is the haststack looks different than it previously did." - Kunal Kapoor, arguing that true market diversification now requires private market exposure as public company counts shrink

The Wrap:

This conversation reveals private markets at an inflection point where technological capabilities and investor demand are pushing toward mainstream adoption, but structural challenges around fees and transparency remain significant obstacles. Kapoor's perspective suggests the industry is following a predictable evolution similar to public markets decades ago, where initial resistance to transparency and fee pressure eventually gave way to investor-friendly standardization. The key question isn't whether private markets will become mainstream, but how quickly competitive forces will drive down costs and increase transparency to make that transition viable for average investors.