Private equity firms, which until now catered only to the wealthiest investors, are now starting to take money from ordinary people. Specifically, private equity firms including large firms such as Carlyle Group, Blackstone and KKR are aggressively targeting the 401(k) retirement plans in which Americans have an accumulated net wealth of approximately $3.6 trillion. That is a stark change from at least a few millions qualified investors once needed to get into private equity funds.
Private Equity Traditional Funding Sources Have Dried Up
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There are two primary reasons for private equity firms aiming to take a slice of 401k. One is that the pool of funds invested in 401k is expected to increase to significant proportions. The other is the private equity firms are increasingly finding it hard to raise capital after the credit market dislocation in 2008. Research firm Cerulli Associates estimates that money moving into 401k is expected to reach $5.03 trillion by 2016. Private equity firms are also seeing diminished interest from pension funds, which in the past were big investors in private equity. Data from research firm Preqin shows that private equity funds raised just $312 billion globally last year, way off from the $669 billion raised in 2007.
Emphasis Shifting To Asset Management
While private equity funds are seriously moving towards accessing individual retirement plans through 401k, some financial advisors are concerned that it could result in potential mismatch between investor interest and private equity objectives. Private equity firms typically demand lock-in of capital for a certain number of years, often invest in complex products and charge more than a mutual fund or an exchange traded fund. David John, who is a deputy director of the Retirement Security Project at the Brookings Institution in Washington, says he is concerned about the potential for individuals being lured into investing in something that isn’t suitable for their stage of life.
However, in an effort to get a share of the huge pools of capital in 401K, private equity funds have already started offering products that resemble a mutual fund product. Investors can already invest in a debt fund of private equity KKR with as little as $2,500 with an option to exit any time. KKR also has a new distressed fund that lets individual investors to participate with as low as $25,000 and offers the option to take out money once in a quarter.
Individual Investors Could Be In Focus Going Forward
Commenting on the shift in the business model of private equities, Harvard Business School professor Josh Lerner says, “The implications for alternative asset managers are staggering because the bulk of all their money has historically come from pensions that are now going away.” Lerner adds, “Over the next five to ten years individual investors are going to be a very important source of capital for alternative asset managers, and you’ll see them rethinking their business models.”
From a job market perspective, it is important to take note of this major shift in the thinking of private equity firms. It is not clear what kind of impact this shift may have on the job market but this changed reality underlines the stress the private equity industry has been going through in recent years.
