cyclingrelf via FlickrThere have been whispers about this for a while, but now it’s happening.
Private equity firms are lowering the $5 million threshold for investments to attract to attract some cash. Specifically, they would like to attract the $3.57 trillion American workers have invested in 401(k) retirement plans, says Bloomberg.
And we’re talking the big boys here: KKR, Carlyle, Blackstone…
This is about solving a problem this business has been trying to dig out of for years. Private equity firms have had trouble raising cash for their traditional work, leveraged buy outs, since the financial crisis wiped out access to credit, and thus, the leverage their business model is based on.
Even Warren Buffett lost on Energy Future Holdings, a $48 billion LBO (the biggest ever) that, six years later, seems to be on the verge of collapse.
The PE industry is trying to diversify into general asset management — real estate, hedge funds, ETFs credit etc. This move into 401(k)s is just another way to do that.
Of course, the problem is the complexity of the industry. Some assets are illiquid and opaque. Plus, PE firms lock up money for as much as a decade. That’s why investing in this space has always been reserved for sophisticated, accredited investors that can throw down big investments.
Last week, before all this news was confirmed, Dan Primack from Term Sheet reported that he spoke to an anonymous source who explained how PE firms could get around this hurdle using “target-date funds.”
Defined contribution plans like 401(k)s usually include something called “target-date funds,” often as a default for workers who don’t specify where they want their contributions to go. Traditionally these go into mutual funds tied to a participant’s age. Basically, it would be higher-risk/higher-reward for younger participants, and become more conservative as the fund glides toward the “target date” (i.e., retirement).
There also are custom target-date funds where plan sponsors use a mix of both mutual funds and separate accounts with institutional money managers in other asset classes (real estate investment trusts, commodities, hedge funds, physical real estate, etc.). This is where private equity could come in, as one of those other asset classes. Likely via fund-of-funds managers that can provide a diversified “sleeve” of exposure.
Such a strategy bypasses the accredited investor rules, since it would be the plan sponsor (not the individual) making the commitment. Kind of like how public school teachers indirectly invest in private equity through their pension systems.
If the custodians of 401(k) plans do start investing in PE it’s going to take some time. The Department of labour has standards for their due diligence to ensure they’re being good stewards for workers.
So that’s something to look forward to.