7 Mistakes Accredited Investors Make with Private Equity Diversification (And How to Fix Them)

Private equity has become a cornerstone of sophisticated portfolios. The allure is obvious: access to high-growth companies before they go public, potential for outsized returns, and a way to step outside the volatility of public markets.

But here's the thing: having access to private equity doesn't automatically mean you're using it well.

Even experienced accredited investors fall into traps that can erode returns, amplify risk, or lock up capital in ways they didn't anticipate. The good news? Most of these mistakes are entirely avoidable once you know what to look for.

Let's break down the seven most common missteps: and more importantly, how to fix them.

Mistake #1: Investing Without Clear Goals

It sounds basic, but you'd be surprised how many investors jump into private equity deals simply because the opportunity exists. A friend mentions a fund. A pitch deck lands in your inbox. The FOMO kicks in.

The problem? Without clearly defined investment objectives, you end up with a hodgepodge of positions that don't actually serve your financial plan.

The Fix: Before committing capital to any private equity opportunity, get crystal clear on what you're trying to achieve. Are you optimizing for growth? Income? Tax efficiency? Legacy building? Your goals should dictate your strategy: not the other way around.

Write down your investment thesis. If you can't articulate why a specific PE allocation makes sense for your portfolio, that's a red flag.

Mistake #2: Over-Concentrating in a Single Strategy or Sector

Private equity isn't monolithic. There's venture capital, growth equity, buyouts, distressed debt, real estate PE, and everything in between. Each carries its own risk-return profile.

Too often, investors load up on one flavor: say, tech-focused venture capital: without considering how concentrated their exposure becomes. When that sector hits turbulence (and it will, eventually), the entire PE allocation takes the hit.

The Fix: Diversify within private equity, not just across it. Spread your commitments across different strategies, stages, and industries. A well-constructed PE portfolio might include some early-stage venture, a mid-market buyout fund, and perhaps a real estate syndication or infrastructure play.

Think of it like building a house: you need multiple load-bearing walls, not just one.

Mistake #3: Underestimating Liquidity Constraints

Here's a reality check: private equity is called "private" for a reason. Your capital is typically locked up for 7-10 years, sometimes longer. There's no ticker symbol to watch, no sell button to press.

Investors who don't account for this often find themselves in uncomfortable positions: needing liquidity they can't access or over-allocating to illiquid assets relative to their actual cash needs.

The Fix: Map out your liquidity requirements before you commit. Consider not just your current situation, but potential life changes over the next decade. Job transitions, health events, real estate purchases, children's education: all of these can demand capital.

A general rule of thumb: keep your illiquid PE allocation to a percentage of your net worth that lets you sleep at night, even if everything else goes sideways.

Mistake #4: Skipping Rigorous Due Diligence

The due diligence process for private equity is fundamentally different from buying public stocks. There's no SEC filing to scan, no analyst reports to reference, and far less transparency overall.

Some investors treat PE like a black box: they trust the fund manager's track record and write a check. That's a recipe for unpleasant surprises.

The Fix: Dig deep. Review the fund's historical performance, but also understand how that performance was achieved. Scrutinize the GP's fee structure (management fees, carried interest, hurdle rates). Ask about key person risk. Understand the fund's investment thesis and whether it aligns with current market conditions.

If possible, speak with existing LPs. Reference checks can reveal insights that pitch decks conveniently omit.

Mistake #5: Ignoring Correlation Risk During Market Stress

Here's something that catches even sophisticated investors off guard: diversification benefits can evaporate during market downturns.

In calm markets, your PE holdings might show low correlation with public equities. But when crisis hits: think 2008 or early 2020: correlations tend to spike. Everything sells off together. That PE diversification you were counting on? It may not provide the buffer you expected.

The Fix: Don't rely solely on historical correlations when constructing your portfolio. Stress-test your assumptions. Run scenario analyses that model how your PE holdings might behave during severe market dislocations.

Consider including truly uncorrelated alternatives: like certain hedge fund strategies or digital assets: as part of your broader diversification approach. At Mogul Strategies, we often explore how blending traditional alternatives with innovative digital strategies can create more resilient portfolios.

Mistake #6: Misunderstanding Fee Structures

Private equity fees are notoriously complex. The classic "2 and 20" (2% management fee, 20% carried interest) is just the starting point. Layer in organizational expenses, transaction fees, monitoring fees, and fund-of-funds fees, and your actual cost of ownership can balloon significantly.

Many investors don't fully calculate the drag these fees create on net returns: especially in lower-performing vintages.

The Fix: Always evaluate returns on a net-of-fees basis. Ask fund managers for transparent breakdowns of all costs. Compare fee structures across similar funds.

And remember: higher fees aren't necessarily bad if performance justifies them. The key is understanding exactly what you're paying and whether the value proposition makes sense.

Mistake #7: Neglecting Co-Investment and Disclosure Dynamics

Co-investments: opportunities to invest directly alongside a PE fund in specific deals: can offer fee savings and concentrated exposure. But they come with their own set of risks that investors often overlook.

Disclosure issues can be tricky. When different investors participate at varying levels of the capital structure, conflicts of interest can emerge. Who gets priority? How are economics divided? What information flows where?

The Fix: Before participating in co-investments, demand clarity on how the deal is structured. Understand your position relative to the main fund and other co-investors. Ask pointed questions about conflict management and information rights.

If the GP can't or won't provide transparent answers, that tells you something important.

Bringing It All Together

Private equity remains one of the most powerful tools available to accredited investors. It offers access to opportunities that simply don't exist in public markets: the chance to back exceptional entrepreneurs, participate in transformational buyouts, and build generational wealth.

But access alone isn't enough. Thoughtful allocation, rigorous diligence, and clear-eyed planning separate investors who thrive from those who merely survive.

The seven mistakes we've covered aren't obscure edge cases. They're common patterns we see repeatedly: and they're all fixable with the right approach.

Whether you're building your first private equity allocation or refining an existing portfolio, take the time to audit your strategy against these pitfalls. Small adjustments today can compound into significantly better outcomes over the long haul.

At the end of the day, successful PE investing isn't about chasing the hottest fund or the most exclusive deal. It's about disciplined execution aligned with your goals. Get that right, and the results tend to follow.