The hidden culture risk in private markets

By Bev Shah, co-CEO, City Hive

Private markets offer investors diversification, access to different return streams and opportunities beyond public markets.

However, many characteristics of private markets - such as long lock-in periods, illiquidity and complex structures - heighten the importance of understanding the culture of the investment managers entrusted with these assets.

In public markets, investors can vote with their feet. If a fund underperforms, lacks transparency or falls short on governance, they can exit quickly.

Private markets, however, demand a different level of trust. Capital is often locked in for long periods with limited avenues for exit. By the time poor governance or cultural failings come to light, it can be too late.

This makes the culture of a private markets' investment manager a critical - yet often overlooked - risk factor.

It is not just about performance or fees; it is about the values, decision-making processes and governance structures that underpin how the firm operates over the long term.

A strong culture - one where transparency, accountability and robust decision-making are embedded - can be the difference between a manager successfully navigating challenges or becoming the next cautionary tale.

See also: The role of culture in investment decision making 

A history of painful lessons

History offers ample warnings about what happens when culture fails in private markets.

Investors who overlook governance and transparency in favour of high returns can find themselves trapped when things go wrong.

For example, Arif Naqvi's Abraaj Group was once the world's largest emerging markets private equity firm, managing $14bn. But behind the scenes, investor money was allegedly misused to cover operational shortfalls.

When questions arose about missing funds, the firm collapsed in 2019, leaving investors—including global institutions—scrambling to recover capital.

Meanwhile, the Woodford Equity Income fund was structured as an open-ended fund but invested heavily in illiquid private assets. When investors rushed to exit in 2019, they found their money trapped as redemptions were suspended. The fund eventually collapsed, wiping out billions in savings.

And Archegos Capital Management, a family office masquerading as a hedge fund, used excessive leverage and opaque swap contracts to build huge, concentrated positions. When margin calls hit in 2021, the fund imploded almost overnight, triggering multi-billion-dollar losses for banks and raising questions about due diligence failures.

Elsewhere, the Long-Term Capital Management crisis in the late 1990s serves as a reminder that even Nobel Prize-winning leadership does not guarantee responsible risk management.

The hedge fund's extreme leverage and illiquid bets led to a catastrophic collapse that required a Federal Reserve-coordinated bailout.

Lastly, Fortress's Drawbridge fund locked investors in for years with the promise of stable returns. However, during the 2008 financial crisis, redemptions were halted and investors found themselves unable to access their capital for far longer than expected.

These cases illustrate a common theme: when governance is weak, transparency is lacking or risk management is compromised, investors pay the price. And in private markets, where exits are limited, the damage is often irreversible.

Shift in pension fund strategy

The UK government has encouraged pension funds to allocate more to illiquid assets such as private equity, infrastructure and venture capital to boost domestic investment and support economic growth.

While this could create long-term value for both pension beneficiaries and the wider economy, it also increases the need for careful due diligence.

Pension fund capital is, by nature, long-term. However, the shift toward higher illiquidity means trustees must be confident investment managers are not just capable of delivering returns but are also responsible stewards of that capital over decades.

This makes assessing culture even more critical. A firm with weak governance, poor alignment with investors or a culture of excessive risk-taking could expose pension savers to unnecessary losses with no easy way out.

What investors should look for

Traditional due diligence tends to focus on track records, strategy and fees. But understanding culture requires a deeper dive:

●        Governance and accountability: How are decisions made? Who has a voice at the table? Are conflicts of interest managed effectively?

●        Transparency and reporting: Does the firm go beyond minimum disclosure requirements? How candid are they about challenges?

●        Employee engagement and incentives: Are teams empowered to challenge leadership, or is there a culture of fear and deference? Are incentives aligned with sustainable, long-term performance rather than short-term gains?

●        Diversity of thought and experience: Does the firm actively seek different perspectives, or is it an echo chamber of like-minded individuals?

Assessing culture is not easy - it requires more than ticking boxes. It demands a willingness to challenge surface-level narratives and scrutinise governance structures. But in a market where liquidity is scarce and exits are hard to come by, it is an essential safeguard against long-term regret.

Pension funds and other long-term investors spend years analysing financial models, stress-testing scenarios and conducting operational due diligence. It is time to put just as much effort into understanding culture.

Because when capital is locked up for decades, investors are not just committing to assets - they are committing to the people managing them. And that makes culture one of the most important risk factors of all.

This article first appeared on Investment Week.