The growing use of target-date funds may offer private equity firms a way to offer such investments to 401(k) investors.
Private equity firms are good at solving complex problems. What’s stumping them? Normal people.
Five years ago, Carlyle Group’s David Rubenstein predicted a future where ordinary savers would be able to invest in private equity, an industry limited to wealthy individuals and institutions. He later suggested that by now, Americans would be able to put some of their 401(k) retirement accounts into the asset class.
Today most mom-and-pop investors still don’t have that option. But a shift in how people are saving in their 401(k)s may give private equity a new way in — keeping firms like Carlyle, Blackstone Group and KKR & Co. eyeing the $4.8 trillion that U.S. workers have saved in their 401(k)s.
“In life you have to have a dream,” Steve Schwarzman, Blackstone’s CEO, said on a call with analysts in January. “And one of the dreams is our desire — and the market’s need — to have more access” between alternative-investment funds and ordinary savers. It was a bold and telling statement coming from the helm of the world’s largest private equity firm.
Offering private equity to individuals has been a challenge because the investments are often hard to convert to cash quickly and they charge fees higher than those of traditional mutual funds that populate 401(k)s. Such retirement plans value assets on a daily basis, presenting a challenge for private equity firms that hold dozens of years-long investments. While private equity’s pitch is that it offers greater returns than traditional mutual funds, it may be hard to ensure each plan participant gets the best of what the asset class has to offer.
“There’s a lot of sensitivity to fees, and you’d need to demonstrate a huge amount of alpha to a participant to justify putting private equity in a plan,” said Brooks Herman, head of data and research at BrightScope Inc., which rates retirement plans. “You’re holding an asset that can be less transparent with its holdings, and the returns can be staggering in their difference between top quartile and bottom.”
