The Public Market Is a Curated Gallery
The S&P 500 is no longer a mirror of the American economy. It is a selection of survivors. As of October 28, 2025, the number of publicly traded companies in the U.S. remains stuck near historic lows while the private market has ballooned into a $15.5 trillion behemoth. This massive migration of capital has created a blind spot for the average investor. Today, Morningstar CEO Kunal Kapoor attempted to shine a light into that abyss by launching the Morningstar PitchBook US Modern Market Index. It is an ambitious effort to blend public and private equities into a single benchmark. But for the skeptical observer, this new map looks less like a guide and more like a marketing tool for the next wave of retail fee extraction.
The pitch is simple. Kapoor argues that traditional benchmarks fail because they ignore the companies staying private longer. He is correct on the facts. In 1999, the median age of a company at its IPO was seven years. In late 2025, it is closer to fifteen. By the time a tech firm hits the Nasdaq today, the massive growth curve has often been fully milked by private equity titans and venture capital insiders. The public is left with the remains. Morningstar wants to fix this by creating a “universal language” for both worlds. However, a universal language does not solve the underlying problem of illiquidity. You can benchmark a private fund against the S&P 500 all you want, but you still cannot sell your stake in a middle market manufacturing plant on a Tuesday afternoon when the water heater breaks.
The Hidden Defaults of the Private Credit Boom
Nowhere is the risk more acute than in private credit. According to Bloomberg market data, U.S. private debt has surged past $1.8 trillion this year. It is the new frontier for retirees chasing yield in a world where 10-year Treasuries are fluctuating wildly. But the yields are high for a reason. During his live session this morning, Kapoor admitted that the industry is at an “interesting point in the cycle” where exits are drying up. If you cannot sell the company, you cannot pay back the debt. To mask this, many managers have turned to payment-in-kind (PIK) loans. Instead of paying cash interest, the borrower just adds the interest to the principal of the loan. It is a high-stakes game of accounting kick-the-can.
The data from Reuters finance reports suggests that selective defaults in private credit are outpacing conventional defaults by five to one. This means companies are not officially “going bust” in a way that shows up on a standard ticker. Instead, they are undergoing quiet, backroom restructurings that standard benchmarks struggle to capture. The table below highlights the widening gap between the transparent public market and the opaque private reality we face in late 2025.
| Feature | Public Markets (S&P 500) | Private Markets (Direct Lending) |
|---|---|---|
| Valuation Frequency | Real-time / Daily | Quarterly (often lag-based) |
| Liquidity | High (T+1 Settlement) | Low (7-10 year lockups) |
| Default Transparency | Public disclosure (SEC filings) | Private restructuring (LMEs) |
| Standard Fee Structure | ~0.03% (ETF) | 2% management + 20% performance |
The Democratization Trap
Kapoor noted that 25% of retail investors are now expressing interest in private equity. Wall Street sees this as the ultimate growth opportunity. With institutional allocations tapped out, the “democratization” of private assets is the new mantra. We are seeing a flood of interval funds and non-traded Business Development Companies (BDCs) hitting the market. These vehicles allow your average Joe to own a piece of a private debt fund. But democratization often means offloading risk from the balance sheets of Goldman Sachs and Apollo onto the 401(k)s of suburban teachers.
The catch is in the fine print. These semi-liquid funds often charge fees three times higher than their public counterparts. They also reserve the right to “gate” redemptions. If everyone tries to leave at once, the door stays locked. We saw early signs of this stress in late 2024, and as we move deeper into 2025, the pressure is mounting. The visualization below shows the staggering divergence: private credit assets are exploding while the number of public options for investors continues to shrink.
The Regulatory Void
Why now? The rush to benchmark private markets is partly a response to a regulatory vacuum. In mid-2024, the 5th Circuit Court of Appeals vacated the SEC’s Private Fund Adviser rules. This was a massive win for the industry. It meant that the federal government could not force private funds to provide standardized quarterly statements or detailed fee disclosures. Per the official SEC regulatory updates from early 2025, the Commission has been forced to take a back seat, relying on “market-led transparency” instead. Morningstar’s new index is exactly that: a private company setting the rules for other private companies.
This lack of oversight creates a “mark-to-model” fantasy. In public markets, your stock is worth what the last guy paid for it. In private markets, your asset is worth what a spreadsheet says it is worth. When interest rates stayed higher for longer throughout 2025, public stocks took the hit immediately. Private funds? They adjusted their models slowly, creating an illusion of stability that may not exist. Investors are being lured by the promise of lower volatility, but they might just be buying delayed volatility.
The true test for this benchmarking experiment will arrive in early 2026. A massive “maturity wall” looms as billions in middle-market debt issued during the low-rate era of 2021 comes due for refinancing. If these companies cannot meet the higher interest burdens, the Morningstar Modern Market Index will have its first real crisis to track. Watch the default rate among CCC-rated private borrowers in January 2026. If that number clips 5%, the mirage of private market safety will finally evaporate.
