Funds' Private Affair

However, Morningstar analyst Todd Trubey says private equity is still relatively rare in the mutual fund space.

"Certainly, I can see how it would be very tempting," Trubey says. "You read all about private equity these days. People get the sense that there's something going on there and they want to get involved. But this remains something very rare."

In general, mutual funds are tapping the growing marketplace of privately held companies through PIPE investments, buying private company debt and investing in the private company itself.

Pricing Problems

Eric Newman, a portfolio manager at TFS Capital, uses alternative investment techniques for his fund, but says he avoids private equity because of pricing issues.

"We're always happy to see mutual funds offering alternative strategies to the retail investor, but we're not sure if private equity is the best fit for an open-ended fund that you need to price on a daily basis," says Newman.

"You have this security that doesn't trade on exchange, so the market is not setting its price. It's hard to really know what its fair value is."

Morningstar's Trubey agrees, adding that being confident about pricing is crucial. "One of the most prominent examples of this sort of thing was with Garrett Van Wagoner. People thought there were significant issues with stewardship at his funds. The trouble came because of problems with fairly pricing securities."