Democratizing Private Markets: Equilibrium Predictions

We study how opening private markets to retail investors affects investors and firms. Calibrating a production-based asset-pricing model, we find that democratization raises retail investors' welfare, but barely. Retail investors benefit little from democratization even if they face no extra cost or other disadvantage relative to institutional investors. The private market is simply too small for improved diversification to matter much. Democratization affects firms more than investors—it substantially reshapes private firms' ownership, temporarily reduces their cost of capital, and induces a large expansion of private capital. Private equity earns a positive CAPM alpha, which shrinks after democratization.