Financial advisors in the United States could steer another $2 trillion into private equity, private credit and other less-liquid private funds over the next five years, according to research released July 30 by Cerulli Associates. The firm estimates advisors already allocate $2.2 trillion to such vehicles. For affluent households, the growth means more portfolios holding investments whose tax reporting looks very different from a mutual fund or brokerage account.
What the research found
The findings come from The Cerulli Report, U.S. Private Markets 2026: Scaling Retail Access. Two-thirds of the asset managers surveyed pointed to advisors' need to show clients added value as a key driver of demand, and more than half cited appetite for income-producing investments. Cerulli expects progress to depend on partnerships among traditional managers, private capital firms, technology platforms, turnkey asset management programs, trust companies and recordkeepers. Daniil Shapiro, a director at the firm, said traditional managers are looking for differentiated capabilities, while private capital managers lack the distribution reach to penetrate the retail market on their own.
Who is affected
The push is aimed squarely at the wealth channel: accredited investors and qualified purchasers working with advisors, and increasingly investors in interval funds, tender-offer funds and other semi-liquid structures designed for smaller minimums. Business owners, executives and retirees with large taxable accounts or IRAs are the most likely buyers.
The after-tax picture
The tax consequences depend heavily on the wrapper. Many drawdown funds and some evergreen vehicles are partnerships. Instead of a Form 1099 in February, investors receive a Schedule K-1, often late in the filing season and sometimes after the April deadline, which can push households into extensions. Partnership income passes through with its character intact, so an investor may report ordinary income, capital gains, dividends and business income from the same fund. Funds operating across the country may also generate income in several states, which can create nonresident filing obligations or composite returns. Semi-liquid funds structured as regulated investment companies usually issue 1099s instead, which simplifies reporting but changes how income is characterized.
Where the investment is held matters as well. Income from private credit is typically taxed as ordinary income, and for higher earners much investment income is also subject to the 3.8% net investment income tax, which applies above $250,000 of modified adjusted gross income for joint filers and $200,000 for single filers. That makes a tax-deferred account appealing at first glance. But partnerships that use leverage or run operating businesses can pass through unrelated business taxable income. Under IRS Publication 598, an IRA with gross unrelated business income of $1,000 or more must file Form 990-T, receives a $1,000 specific deduction, and pays tax at trust rates rather than corporate rates. Debt-financed income from partnerships flows into that calculation.
Example, illustrative round numbers: an investor holds a $500,000 stake in a leveraged private equity fund inside an IRA. The fund allocates $20,000 of unrelated business income to the account. After the $1,000 specific deduction, $19,000 is taxable to the IRA at trust rates, paid from IRA assets, and the custodian must file a return. The same stake in a taxable account would avoid the IRA-level tax but would pass through ordinary income, possibly state filings and the net investment income tax to the owner's personal return.
Moves to discuss with your advisor
- Whether a fund is a partnership issuing K-1s or a registered fund issuing 1099s, and when the forms typically arrive.
- Whether the fund's strategy uses leverage or operating businesses that could generate unrelated business taxable income in an IRA.
- How many states the fund expects to report income in, and whether it offers composite filing.
- How income from private credit compares, after tax, with municipal bonds or other income sources for a household in a high bracket.
- How liquidity limits interact with required minimum distributions if the fund sits in a retirement account.
Asset location decisions for these vehicles are worth reviewing with a CPA who has seen the specific fund's prior K-1s.
What to watch
Cerulli's forecast assumes continued product development aimed at retail investors, including vehicles for retirement plans. As more private funds reach smaller accounts, watch whether sponsors shift toward 1099-issuing structures and blocker entities designed to limit unrelated business taxable income, and whether custodians change policies on holding K-1 partnerships in IRAs.
Sources
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
