Risks and rewards for private equity's 401(k) push
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Two weeks ago we discussed private equity's push for retail investors — and how the Trump administration wants to hasten its efforts.
Since then there already have been three more related announcements, including 401(k) giant Empower saying that it will allow private equity and credit into some of its retirement plans.
- Vanguard also announced an interval fund in partnership with Blackstone and Wellington Management, while Coatue is launching a public/private tech fund where the minimum investment ins $50k.
For private equity, the upside is obvious. Trillions of newly available dollars, particularly at a time when it's become harder for many of them to raise institutional capital.
For retail investors, the pitch is about diversification and superior long-term returns than from passive index investing.
What could go wrong? The short answer is a lot.
- Private equity may want money from the public, but there's no indication that it will share much information with the public.
- Portfolio company financials, strategy shifts, and other key information likely will be kept from retail investors. Institutional LPs still will get their quarterly and annual reports, plus insights via LPAC meetings, fomenting a sizable knowledge gap.
- If there is some sort of meltdown, retail investors may be the last to know. And they'd have fewer exit options than would institutional investors with deep experience in the LP secondaries market.
"We need to be careful of what we wish for," a longtime private equity exec recently told me about the retail drive.
- His argument was that private equity regularly suffers scandals — sometimes fraud, more often poor decisions — but that the headline risk is minimized by its curated investor base.
- Once such events hit Mom and Pop, the blowback could be stronger than the industry realizes.
The bottom line: Private equity's potential rewards clearly outweigh the risks, so there's no stopping this train (unless the White House unexpectedly changes its mind). But that doesn't mean it will be a smooth ride.
