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On the surface, the proposal sounds so attractive: give ordinary Americans the same investment opportunities that billionaires, endowments and sovereign wealth funds already enjoy.
Over the last couple of decades, the ranks of public companies have shrunk, while the number of private equity-owned businesses has quintupled, and private credit funds have muscled into lending. PE assets alone topped $4.7tn last year, nearly twice the total in 2019.
Many big institutional investors put 30 to 40 per cent of their money in alternative assets, as they chased outsized returns that were less tied to the stock market’s ups and downs. But many ordinary Americans are shut out by rules that limit their access to funds that invest in private assets alongside public equity and bonds.
Now Donald Trump’s administration could throw open the doors. The Securities and Exchange Commission is rethinking rules that limit funds with more than 15 per cent in private assets to wealthy investors. And the White House may make it easier for corporate 401k plans, the primary US retirement savings vehicle, to put money into private assets as well.
“For an American household that wants to set aside money for the long term, some portion of it should be in private assets because it’s such a large portion of the market,” says Michael Pedroni, a former US Treasury official who now runs the consultancy Highland Global Advisors. “If you can do it in the right way and find the right vehicle, it would be a good thing for fairness.”
But there is the rub. The recent enthusiasm for putting ordinary US retirement money into private assets comes at a time when institutional investors are falling out of love with the sector and are looking to cut back.
Several giant Canadian pension funds recently reported that their PE returns last year lagged behind their benchmarks and the industry’s total assets under management dropped last year for the first time in decades, as new fundraising plunged 23 per cent.
The problem for PE is that volatile markets, higher interest rates and now uncertainty over tariffs have made it hard for firms to sell or float the assets that they own. The funds may report fabulous paper returns, but they have so far failed to crystallise, leaving existing investors strapped for ready cash.
Private fund groups Blackstone, Apollo and KKR are seeking new blood. They have already teamed up with traditional asset managers to offer private funds to wealthy retail investors. But changing the SEC and 401k rules would widen the opportunity.
Not only could the $9tn retirement market be fertile ground for raising new private funds, but it also could juice demand for buying stakes in existing ones, known as “secondaries”, allowing institutional investors to get out.
The potential for trouble is huge. There is already evidence that retail private funds are paying over the odds, shelling out on average 4 per cent more last year for secondary stakes than traditional buyers. Perhaps they are better at spotting good opportunities than those buying for institutional clients. Perhaps not.
Even some in the industry are concerned. Thoma Bravo founder Orlando Bravo warned last week that retail PE funds could become a dumping ground and “end up saving these companies that people cannot sell”.
There are also questions around liquidity. In theory, retirement plans are long-term propositions, so investors do not need to worry about being unable to sell out quickly. In reality, early “hardship” withdrawals from 401k plans have doubled in five years to 4.8 per cent.
Industry experts say that there will be safeguards: private assets would mainly be offered as part of “target date funds”. These invest in a variety of assets and become less risky and more liquid as the planned retirement date approaches.
But analysts predict that switching 15 per cent of assets in a target date fund could push up fees by between 30 and 100 basis points per year. That may not sound like much, but consider that the average expense ratio for target date funds is 68bp, and Vanguard and State Street charge less than 10.
It all adds up to this: retail funds appear to be buying into alternative assets at higher prices and they charge higher fees than public equity funds at a time when returns have been weaker. What comes to mind is Vanguard founder Jack Bogle’s observation that, “In investing, you get what you don’t pay for”.
Buyer beware.
