What’s Broken in Private Equity and Venture Capital?

This article is part of The Assetizer, GenTwo's thought leadership platform.

For decades, private equity and venture capital have been the crown jewels of investing. These asset classes gave institutions and the ultra-rich the chance to back the next Stripe, SpaceX, or OpenAI long before an IPO. If you were in, you could capture extraordinary growth. If you were out, you watched from the sidelines.

But exclusivitiy isn’t the only problem. Despite spectacular successes that make the headlines, look under the hood and you will find many people, including industry insiders, think that PE and VC are broken. And don’t just take my word for it. We’re having a panel discussion tonight at GenTwo on this very subject, with over 80 people signed up.

Having prepared to moderate that, I thought it a good opportunity to go over the issues.

What does broken mean in this context? And what’s actually wrong?

The Access Problem

First, there’s access. Unless you’re a pension fund or an ultra-high-net-worth individual with millions to commit, good luck getting into a top-tier fund. Even if you do have the capital, you still need the right connections.

This is the original exclusivity problem. The deals that create fortunes are structured so that only a narrow club of insiders can participate. Everyone else sees the headlines — the unicorn valuations, the IPO pops — but they don’t get to join the ride.

The Selection Problem

Then there’s the issue of selection. Venture capital runs on what’s called a *power law*.

• Around 70% of portfolio companies go nowhere
• About 20% muddle along and might return capital.
• The top 10% — sometimes as few as 1% — drive almost all the returns.

So when you look at a fund with 50 or 100 startups, it might look diversified. In reality, it’s not. The outcome still depends on one or two companies. If your fund happens to back the next Canva or OpenAI, you look brilliant. If it doesn’t, you’re left with a long list of deadweight.

This is the diversification illusion. A big portfolio doesn’t protect you if the winners aren’t in it. 
 

The Liquidity Problem
 

Finally, there’s liquidity. Or more accurately, the lack of it.

Traditional PE and VC funds lock up capital for 7 to 10 years. You commit, you wait, and only a decade later do you find out if you picked right.

That kind of horizon might work for a sovereign wealth fund or a university endowment. It doesn’t work for most private investors, who need more flexibility in their portfolios.
 

So Why Do People Still Want In?
 

With all these problems — exclusivity, guessing games, lock-ups — you might wonder why anyone is clamoring for access.

The answer is simple: performance.

The long-term data still shows attractive returns. Cambridge Associates pegs VC IRRs in the mid-teens over long horizons. And there’s the allure factor: the idea of owning a piece of the next unicorn before the rest of the world even knows its name.

So demand is high, but the product design doesn’t match the needs of most investors.
 

The Fixes Emerging
 

This is where innovation comes in. A growing number of players are trying to “crack the PE/VC code” — solving at least part of the access, selection, and liquidity problem.

• Platforms like Moonfare and iCapital pool smaller investors into feeder funds, allowing them to collectively meet institutional ticket sizes.
   
• New structures like Swiss AMCs and the EU’s ELTIF 2.0 funds package private markets into regulated, sometimes semi-liquid vehicles.
   
• Other product innovators like Accumulator (a client of ours at GenTwo) avoid the early-stage lottery altogether, focusing on proven category leaders and securitizing them into bankable certificates that can, at least in theory, be traded more flexibly.

Each of these models has trade-offs. Platforms widen access, but you’re still subject to the fund’s 10-year cycle. Structured products make holdings bankable, but liquidity is more “technical” than real. Later-stage strategies reduce deadweight, but they come at higher valuations.

Broken, or Just Evolving?
 

So is private equity and venture capital really broken?

Not exactly. The asset classes still deliver real returns. The challenge is that they’ve only delivered them for a privileged few, in vehicles that don’t suit the broader investor base now demanding access.

What we’re watching is not collapse, but transition:

• From closed clubs to more open architectures
   
• From blind-pool guessing games to more targeted bets.
   
• From decade-long lock-ups to structures that promise, if not perfect liquidity, at least more flexibility.

That’s why this debate matters. Because if we can truly crack the PE/VC code, one of finance’s most powerful engines of wealth creation can be opened up to a much wider world.
 

Tom Lyons, GenTwo