Private Capital Markets and Inequality

Wealth, finance, and the macroeconomy

Posted

13

May 2026

| By

Ararat Gocmen

Clara Martínez-Toledano

Vrinda Mittal

|

Research summaries

Research Paper

What is this research about and why did you do it?

Income and wealth inequality has steadily risen in the U.S. over the last two decades. At the same time, private capital markets have expanded, while public stock market listings have fallen. To what extent could both these trends be related to the increasing participation of high-net-worth individuals (HNWIs) in private capital markets? SEC regulations restrict who can invest in private companies, such that HNWIs are generally the only individuals who can do so. Thus, if these private companies yield excess returns relative to public stock markets, then the growth of private capital markets could raise economic inequalities. Moreover, if the financing provided by HNWIs allows private companies to remain private for longer, then this could generate a self-reinforcing feedback loop between private capital market growth and rising inequality.

How did you answer this question?

We combine data on U.S. private capital market activity from PitchBook with data on U.S. income and wealth inequality. These data allow us to identify HNWIs’ investments in private companies, calculate the returns on these investments, and evaluate the investments’ effects both on the companies raising financing and on economic inequalities. We exploit as a quasi-exogenous shock to HNWIs’ participation in private capital markets the expansion of the federal long-term capital gains tax exclusion on qualified small business stock (QSBS). We also simulate wealth inequality under a counterfactual scenario in which HNWIs had invested in public stock markets rather than private companies.

What did you find?

We find that HNWIs have become more active investors in startups, with the share of financing raised by U.S. early-stage companies from U.S. HNWIs tripling from 2% to 6% from 2004 to 2022. Figure 1 shows that HNWIs earned excess returns on their early-stage investments relative to public stock markets, with the $327 billion accumulated value of these investments by the end of 2022 being almost double that of their counterfactual investments in any major U.S. public stock market index. We then exploit the QSBS reforms to show that HNWIs’ increased early-stage investments induced startups to remain private for longer and raised state-level income inequality, driven by HNWIs’ higher realized capital gains. We also quantify these investments’ implications for U.S. wealth inequality by means of counterfactual simulations. Figure 2 shows that the top 0.5% wealth share would have grown by 26% less from 2010 to 2022 if U.S. HNWIs had invested in the NASDAQ 100 rather than U.S. early-stage companies. Finally, we show that new investor entry increased incumbents’ returns and induced them to expand their early-stage investments, generating a self-reinforcing feedback loop between private capital market growth and inequality.

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***Figure 1: Accumulated Value of U.S. HNWIs’ Early-Stage Investments in U.S. Companies***
This figure describes the returns that U.S. high-net-worth individuals earned on their early-stage investments in U.S. companies from 2004 to 2022, comparing them to the counterfactual returns that they would have earned had they instead invested in the total return version of any of the NASDAQ 100, S&P 500, or Russell 2000 public stock market indices. The figure plots the accumulated value of their investments by the end of each year, expressed in nominal terms.

***Figure 2: Top 0.5% Wealth Share: Baseline vs. Counterfactuals***
This figure compares the baseline top 0.5% wealth share in the U.S. from 2010 to 2022 to the counterfactual top 0.5% wealth share, constructed by replacing U.S. high-net-worth individuals’ realized and unrealized capital gains from their early-stage investments in U.S companies from 2004 to 2022 with counterfactual capital gains based on the total return version of the NASDAQ 100 public stock market index. We present the counterfactuals both without and with rescaling the capital gains from PitchBook to match the total QSBS exclusions reported in tax filings from the IRS.

What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

Wealthy investors’ access to exclusive opportunities to invest in private companies has become an important driver of income and wealth inequality dynamics in the U.S. Its importance is likely to keep growing as private capital markets continue to expand relative to public stock markets while access to them remains restricted. Policymakers are currently debating widening that access as a result, although our evidence suggests that access does not necessarily imply success: HNWIs’ rankings in the distribution of their annual rates of return are persistent. Thus, differences in skill in early-stage investing may amplify the inequality within private capital markets at the same time as inequality between HNWIs and the individuals excluded from those markets is already growing.

What are the next steps in your agenda?

Since private capital markets are growing globally, it would be interesting to extend the analysis beyond the U.S. This extension would help us identify how the differences in financial structure, tax regimes, pension systems, and the organization of private capital markets shape the relationship between the growth of those markets and the rise in economic inequalities. Another extension would be to embed our findings in a general-equilibrium framework that captures additional mechanisms, including companies’ endogenous financing and listing decisions, equilibrium effects on asset prices and employment, and changes in the allocation of savings across asset classes.