Morningstar recently examined mutual fund ownership of private firms and found that most funds limit such exposure or avoid it all together. That said, some prominent funds do own private companies, so it's worth examining the risks these positions court. (See the full paper on Morningstar's corporate site. This report was compiled before Morningstar's acquisition of PitchBook, a data provider for private equity professionals, and does not utilize PitchBook data.)

One of the biggest challenges is that no industry standard exists for determining appropriate valuations for private companies in mutual funds. What's more, fund companies could have varying levels of access to a private company's management team, board, and financial information, which are helpful in estimating fair values, with bigger investors potentially having an advantage. Private-firm investments could come in the form of preferred stock, common stock, or convertible bonds, which could affect valuations, dividend payments, future upside or downside potential, and priority in the case of a default.