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Soon We'll All Be Private Equity Investors

Image via Adeolu Eletu on Unsplash

Private equity firms don't exactly have the best reputation among many people.

One of the popular views of private equity firms is they acquire businesses and leave many people unemployed in their quest to improve companies and generate a profit.

On the basis of investing in private equity funds, proponents believe they deliver superior returns compared to other investments. Research shows private equity firms outperformed public markets between 1994 and 2005, but have struggled since.

Critics of investing in private equity funds often cite illiquidity, higher risks and complex fee structures as reasons unsophisticated investors should stay away from them.

Regardless of your opinion, many Americans will soon be able to invest in private equity funds through their 401(k) accounts as the U.S. Department of Labor issued an Information Letter that would allow private equity investments to be offered in professionally managed investment funds.

The Information Letter addresses private equity investments in professionally managed defined contribution funds such as target date, target risk, or balanced funds. The Information Letter does not allow individuals to make direct investments into private equity funds on a standalone basis.

Regardless, Evercore analysts predict the move could enable private equity firms to capture up to $400 billion of the $6.5 trillion 401(k) market.

"This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns," U.S. Secretary of Labor Eugene Scalia said. "The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement."

Not surprisingly, not everyone approved of the move by the Labor Department.

"The private equity part of private markets are some of the riskiest investments with extremely high-leverage and very high fees," said Dennis Kelleher, president and CEO of consumer advocacy group Better Markets. "Additionally, while the [Labor] Secretary plays salesman for private equity, claiming 'strong returns,' the truth is that private equity performance and returns have often been poor at best."

With private equity now making its way into Americans' retirement accounts, it may be just a matter of time before ordinary individual investors will have the opportunity to invest in them as well.

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