Bring on the replacements.

The $12 trillion private equity industry is running out of customers. After years of paying high fees for questionable benefits, traditional investors in private equity are either slowing new commitments or actively reducing their holdings. These investors include public pension plans like the California Public Employees Retirement System, college endowment funds like Harvard and Yale, insurance companies like Allianz and Metlife, and high-net-worth individuals.

Does the industry intend to slow down or shrink? Not a chance. The industry intends to replace these sophisticated investors with the retirement and brokerage accounts of John and Jane Q. Public.

By way of background, private equity comes in many forms.

Venture capitalists invest in early-stage companies hoping that a handful of home runs will make up for dozens of strikeouts.

Corporate acquirers buy out publicly traded companies and take them private. Much like a house flipper buying a fixer-upper, the goal is to strip assets and/or spiff up the company for resale to the public at a higher price. These acquisitions may be leveraged with loans and junk bonds fronted by other private equity firms that invest in dodgy credit.

Activist firms purchase minority stakes in publicly traded companies and agitate for board seats and structural change. Still, other private equity firms invest in global infrastructure.

Regardless of objective, private equity funds typically share several characteristics. First, there is no public market for the funds. Valuations are not determined by market prices but by estimates from the fund managers themselves. The funds are not liquid. Investors may be locked in until the fund terminates. If withdrawals are permitted, they are gated so that only a small percentage of the investment can be redeemed quarterly or annually. Fees are very high. The standard business model is “two and twenty,” meaning that the fund sponsor is paid 2% of net asset value annually and receives 20% of any capital gains.

How are private equity managers going to persuade everyday investors to buy what the most knowledgeable and experienced investors are selling? Cue the marketing machinery.

Emphasize the snob appeal of private equity. Once the exclusive province of the rich and established, it is finally being made available to the hoi polloi.

Tout the lack of price volatility. Private equity managers do not necessarily mark down the value of their holdings when public markets decline even though it is obvious that the values of both decline in tandem. This creates an illusion of price stability.

Claim a benefit from diversification even though there are already thousands of stocks, bonds and mutual out there with greater transparency and liquidity to choose from.

Promote performance. Comprehensive and reliable performance data is hard to come by, but it is difficult to believe that institutions en masse would be cutting back on outperforming assets. To the extent that newbie investors will be buying institutional cast-offs, the chances of outperformance are further diminished. As the highly respected Moody’s Investors Service puts it, such a possibility “raises questions about alignment, transparency and product integrity.”

Jeffrey Scharf welcomes your comments. Contact him at jeffreyrscharf@gmail.com.