How high-net-worth investors in private capital markets are reshaping US wealth inequality: Clara Martínez-Toledano concludes her Stone Centre grant
Stone Centre grant recipient Clara Martínez-Toledano (Assistant Professor of Financial Economics, Imperial College Business School), has concluded her project tracing how the rise of US private capital markets has contributed to inequality. Clara’s Stone Centre-funded project, ran from October 2023 to February 2026. The resulting paper, “Private Capital Markets and Inequality”, has now been submitted to the American Economic Review and was awarded the IIPF Peggy and Richard Musgrave Prize in 2025. The paper was co-authored by Stone Centre PhD scholar Ararat Gocmen, UCL, and Vrinda Mittal, Assistant Professor of Finance, Department of Finance, UNC Kenan-Flagler Business School.
We caught up with Clara to find out more.
Hi Clara, congratulations on concluding the project. Could you tell us briefly what you set out to investigate?
Over the last two decades, two trends have moved in parallel. Private capital markets have expanded substantially while public stock-market listings have declined, and at the same time income and wealth concentration in the United States have continued to rise. The central question we wanted to answer was whether high-net-worth individuals (HNWIs) have increased their participation in private capital markets, and whether that growing participation has contributed both to the expansion of the markets themselves and to widening economic inequality.
What were your key contributions to the project?
Together with my co-authors, I helped bring together parts of the story that had largely been studied separately. We first documented how HNWIs’ participation in US private capital markets has evolved and developed a way to calculate the returns on their early-stage investments. We then used the QSBS reforms as a natural experiment to identify how tax-favoured investments by HNWIs affected startups’ access to financing and their likelihood of remaining private. Finally, we connected these investment patterns and returns to state-level income inequality and national wealth inequality. Bringing these elements together allowed us to trace a chain running from tax policy, through investor behaviour and company outcomes, to the distribution of income and wealth, and ultimately to the feedback loop between private capital market growth and inequality. I contributed the most to the inequality simulations part, as this is my area of expertise.
Which data sources made this possible?
The empirical core of the project is novel data on private capital market activity from PitchBook, which we paired with distributional income and wealth data from the IRS Statistics of Income, the Survey of Consumer Finances, the Forbes 400, and state-level wealth data from GEOWEALTH-US. The PitchBook dataset we worked with covers more than 455,000 deals, 208,000 US companies, more than 3.1 million investments, and almost 130,000 investors over the 2004 to 2022 period. The Stone Centre grant was essential here, it gave us access to that data, which has remained the core empirical input of the project throughout.
What are the most striking findings?
HNWIs’ early-stage investments in the US have grown remarkably. They went from $0.4 billion in 2004 to $15 billion in 2022, peaking at $25 billion in 2021. Their share of early-stage financing tripled, from 2% to 6%. To establish a causal link rather than just a correlation, we exploited the expansions to the Qualified Small Business Stock (QSBS) capital gains tax exclusion, which the federal government introduced after the 2008 financial crisis. Using a difference-in-differences design comparing eligible and ineligible companies, we found that the QSBS reforms increased the probability that an eligible company raised financing from US HNWIs by 2.7 percentage points, and increased the probability that those companies remained active private companies by 5.2 percentage points, equivalent to a 5.6% increase relative to the control group.
And how does this translate into the inequality story?
In two related ways. At the state level, we show that the rise in HNWIs’ early-stage investments widened the average income gap between the top 0.5% and the bottom 99.5% by around 1% of the pre-reform gap. At the national level, we quantify how the excess returns HNWIs earned on early-stage investments, relative to public stock-market benchmarks, explain around 26% of the growth in the national top 0.5% wealth share between 2010 and 2022. We also document a self-reinforcing feedback loop: when new investors enter following the QSBS reforms, that raises incumbents’ returns and induces them to invest still more in early-stage companies. So it isn’t a single static channel; there is a reinforcing dynamic that compounds the effect over time.
What does this feedback loop mean for policymakers considering preferential tax treatment for early-stage investing?
It means the distributional consequences of these incentives may be larger and more persistent than a one-off estimate would suggest. Preferential tax treatment can increase startup financing and help companies remain private, but access to these investments is concentrated among already wealthy households. When the policy raises company valuations and investor returns, those investors gain greater capacity to reinvest and benefit from future opportunities, so the initial effect can compound over time. Policymakers should therefore assess these incentives not only by the additional financing or innovation they generate, but also by who receives the gains and how those gains accumulate. This does not necessarily mean such incentives should necessarily be removed, but their benefits should be weighed against their longer-run effects on income and wealth concentration.
Was anything surprising as the project developed?
One of the most surprising aspects was how the analysis developed from documenting a trend into uncovering a much broader causal and dynamic mechanism. As the data work progressed, we were able to trace a chain of effects: the QSBS reforms encouraged investor entry; this affected startup financing and companies’ likelihood of remaining private; the resulting returns contributed to income and wealth concentration; and those gains encouraged further investment. The feedback-loop result was not originally the centre of the project, but it became one of its most important findings. We were also struck by how unequal the returns were within the HNWI group itself. Average returns were high relative to public-market benchmarks, but the median investor earned close to zero, meaning that much of the aggregate effect was driven by a relatively small number of highly successful investments and investors.
What’s next for the project?
The paper has now been submitted to the American Economic Review. In the coming months we will continue to polish the paper, prepare for possible referee reports, and present the project at additional academic venues. We are also continuing to improve the documentation of the data-cleaning procedures and the robustness of the return and inequality analyses. We also have some follow-up research projects studying the distributional implications of growing private capital markets.
Authors
Stone Centre at UCL
Stone Centre at UCL.