Private Risks & Hidden Volatility

Private‐market investments can often look very stable. Appraisal‐based prices mosey along in polite quarter-to-quarter steps.  Volatility appears muted, losses seem rare, and the line on the performance chart drifts serenely upward.  Compare that to a public-market graph that zigs and zags like a heart monitor, and you might wonder why anyone would bother with public stocks or bonds at all.

That seductive vision is one reason private funds have become popular among high-net-worth families.  But it’s the underlying value - and the risk of losing it or the prospects of growing it - that matters, not the value someone prints on a statement.  Below, we unpack three realities of private investments that families should keep front of mind.

1. Younger, Smaller, Riskier

Most private-equity and private-credit deals involve companies that are earlier in their life cycle.  Revenues are smaller, competitive moats are thinner, and management teams often lack the seasoning that comes only from surviving a recession or two.  Their balance sheets often reflect their youth: leverage is higher, cash cushions are thinner, and credit ratings (when they exist at all) sit several notches below investment grade.

These businesses can be terrific engines of growth, but they also wobble more easily when the economic road gets bumpy.  

2. The Illusion of Low Volatility

Public securities are “marked to market” every business day. When pessimism reigns, prices gap lower in full view of the evening news crawl.  In private markets, valuation committees meet quarterly - or even annually - to apply models and judgment.  That slower cadence does not make the underlying enterprise steadier; it simply delays the moment when news, bad or good, shows up in the numbers.

Think of public markets as a carnival mirror: sometimes they exaggerate, sometimes they shrink, but you see a new reflection every second.  Private marks are more like an oil painting: deliberate, considered, and - until the next sitting - unchanged.  The result is that private assets often look less risky on paper, even when their true economic risk is greater.

The gap can be meaningful.  During periods of stress, we routinely see public companies trading at significant discounts to where private equity portfolios are marked.  That mismatch eventually corrects, and when it does, the private investors sometimes discover painful truths.

3. When Fraud Hides in the Shadows

Opacity carries another cost: it lets bad actors operate far longer than they could in daylight.  Bernard Madoff and Tom Petters are the marquee examples—each ran multi‐billion-dollar frauds for decades before events forced a real‐time tally of assets and liabilities. 

Public markets don’t eliminate fraud, but the ability to sell an hour from now is a powerful mitigant.  In private markets, if an investor discovers something fishy or fraudulent, they may have little actual recourse after they’ve committed and contributed capital.

How We Take Private Risks

At Ahara Advisors, we are not anti-private-market; far from it.  Private markets can be a source of great companies that deliver compelling after-tax returns.  We try to avoid some of the pitfalls of private investing by:

1. Screening for the High Potential.  We want our private investments to drive outsized returns, which means that we are either buying:

   - A decent asset at distressed prices or

   - Paying a fair price for a potentially wonderful company

2. Benchmarking Against Public Opportunities.  We can evaluate private investments against the public opportunity alternative, and if expected returns are roughly equivalent, we’d prefer to invest publicly. 

3. Sizing Appropriately.  We size exposure so that the illiquidity will not derail a family’s broader plan. 

Overall Market Commentary

Total Returns (Time Weighted / Distributions Re-invested)

Source: Bloomberg

Note: Equity Indices - DJIA, S&P 500, NASDAQ; Fixed Income Indices - SPDR Bloomberg 1-3 Month T-Bill, BBG Municipal Bond Index, BBG US Corporate High Yield, BBG US Agg. Total Return, BBG US Gov.t 10 Year

It has been an extraordinary time to be an investor in stocks since the end of 2022.  Major stock market indices continue to hit new highs, and investors have made strong returns.

Stocks had a very negative period between March & early April after the Trump administration announced aggressive tariffs with major trading partners. The administration walked back, or delayed many of the tariffs, due to the crash in equity and bond markets, causing a large relief rally.

In July, many stocks are continuing to reach new highs despite a new set of tariff announcements from the Trump administration.  The stock market seems to be betting that the tariff “bark” will be much worse than its “bite” this time around.

S&P 500 Forward Price Earnings Multiples

Source: Bloomberg, SPX Index P/E

Current valuations are at around 24x forward earnings and are about 30% higher than the 50 year average PE (price-earnings) of 17.  We believe it is more likely for PE ratios to drop closer to 17x in the next 3-5 years, than it would be that they continue to expand.  This has led us to be more cautious on many public stocks at this point in time. 

It would not surprise us at all if there was another bout of volatility as we get closer to tariff implementation deadlines.  It’s likely that the April 2025 market drop, paved the way for a moderation on tariffs from the Trump administration.  And it’s quite possible that something similar may need to happen this time around, as well.

Public & Private Fixed Income

Source: Bloomberg, Cash: BIL Equity, HY Bond: HYG Equity IG Bond: LQD Equity, Municipal Bond: MUB Equity. Tax Rate Assumptions: Federal (37%), State (10%)

Cash vs. Other Fixed Income

Cash (US Treasury Bills) continue to have a very healthy yield relative to their riskier alternatives like high yield bonds, longer duration treasuries, and investment grade bonds.  We think there is little reason to travel out on the risk curve in fixed-income given this dynamic. 

Short Term Interest Rate Market Predicted Path (as of 7/14/25)

Source: Bloomberg, World Interest Rate Probability (WIRP) as of 7/14/2025

High Yield Bonds (Junk Bonds)

High Yield Credit Spreads: Additional yield received above US Treasuries for debt of riskier companies

Source: Bloomberg, BarCap US Corp HY YTW 10-Yr Spread (CSI BARC Index)

The above chart displays a modest credit spread for high-yield bonds issued by companies with riskier balance sheets. We think investing in high-yield bonds will make more sense once credit spreads substantially increase.   

 If the United States does enter a recession over the next few quarters, we believe that the 2.73% credit spread, shown in the above chart, will provide poor compensation for defaults in high yield bond portfolios. 

Investment Grade (IG) Bonds

Investment Grade Credit Spreads: AAA 10-Yr premium received above US Treasuries (in basis points; 1 basis point = 0.01%)

Source: Bloomberg, BASPCAAA Index

Investment Grade bonds are debt instruments issued by companies that rating agencies deem high quality and have a low risk of defaults.  An investor is receiving very minimal additional compensation to treasuries (1.1%), shown in the above chart, for investing in this asset class; not enough to provide adequate compensation for a standard default cycle. 

Municipal Bonds

Source: Bloomberg, LMBIYW Index

Municipal Bond Index (YTW)

Municipal bonds can be a tax-efficient way to generate yield and have recently reached levels that are more favorable. We recommend allocating exposure to the short end of the curve (maturities <1 year) as long-duration bonds still do not give adequate yield to compensate for interest rate and duration risk.

It’s important to understand one’s marginal tax rates and jurisdiction before investing in municipal bonds as those factors determine one’s after-tax yield and the attractiveness of the asset relative to treasuries or corporate bonds.  Recently, we haven’t seen many compelling opportunities in high quality municipal bonds.