How welcomed would the idea be of private equity investments in your 401k?
Well, according to Fortune magazine, the idea may not be far off for the non-accredited investor (non-millionaire, non-institutional investor).
It’s long been an untapped market for the private equity industry, made up for by the fact that around a quarter of all new private equity industry cash inflow stems from U.S. public pension systems.
With public pension systems generally underfunded, and structural changes on the way (at least if elected officials manage the public purse in a responsible way), private equity executives are looking for new ways to replace a large source of their revenue stream. One way to address the shift from defined benefit to defined contribution plans: expand the range of individuals not restricted from taking part in private equity investments.
The idea of allowing the non-accredited investor to incur greater risk, and the associated higher expected return, is not met with much approval from bureaucratic managers at the SEC, who generally insist on “protecting” individuals from taking on too much risk.
With likely SEC general disapproval acting as a regulatory hurdle, according to Fortune magazine, private equity executives and their legal teams are in the process of developing products that could be offered to defined contribution plans and still pass regulatory burdens.
The idea stems from the recent growth in custom target date funds, which have grown quite quickly in recent years. With target date funds, investors generally have the option of investing in both mutual funds and other asset classes, such as commodities and real estate. The general work-in for private equity is including private equity in the “other asset classes” category.
Essentially, private equity works itself into the 401k arena by working with the 401k plan sponsor instead of the individual investors, thus avoiding (unnecessary) investor regulations.
Of course, the technical issues of how daily pricing would work are apparently still being worked out. For example, private equity investments are generally priced on a quarterly basis in disclosing activity with limited partners; or how initial cash inflow would be handled.
Although still not finalized (is there ever anything in the financial world that really is finalized?), the idea of private equity investments in non-accredited investor portfolios should excite the small investors tired of living with lower expected returns.
The idea is also appears pretty exciting for the private equity industry as a whole, although some are likely concerned about what such high cash flows would do to the industry’s overall expected return. Will it continue to exhibit higher returns than the S&P or Dow Jones?
In any event, private equity may be coming to your 401k in the near future – an amazing development for individuals long shut out from the higher yielding world of private equity.
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