If Larry the Fink wants it, you know it's bad for America. Now for something that will help America - how about a rule banning private equity from the American private home market?
If rents are such that buying and managing homes with borrowed money makes sense, then the rich people that invest in PE funds would just buy the houses themselves if the PE funds couldn’t.
Financial institutions are merely bloodsucking intermediaries standing between someone’s money and an opportunity, arbitraging information inefficiencies, economy of scale and government handouts (lower borrowing costs). The intermediary can improve efficiency and the speed of market adjustment, but I can assure you there would be buyers for these homes in any case. We just had two decades of QE- too much money chasing assets.
Corporations are fictional entities that exist at the sufferance of our government. They can prohibit such ownership - or use punitive tax rates to make it unpleasant.
Are you saying all corporate ownership of private housing should be banned? I couldn't hold a couple of rental properties in an LLC? I presume this wouldn't apply to multi tenant dwellings? Or do we somehow carve out private equity for different treatment?
So a few pissed off sole proprietors, does this also pure REITs out of business? What about bank ownership of homes in mortgage default? I'm no lawyer but I think you are; is this all reasonably workable?
Bank ownership of homes in default is a different issue as the ownership is temporary as the banks are looking to unload the property asap. They are simply holding the home as collateral on a loan that defaulted and not as an investment.
Thanks for this. It reminds me to have a talk with my investment manager and make certain he isn't putting my money into ESG graded funds or anything with PE buy-in.
That's the rational response. 401k's are self-directed, meaning you, the individual, has final say on how your savings are invested. If you do not want to invest in PE, don't. But why deny others the opportunity if they understand the risks?
Because as we should all have learned from the Great Recession when a significant portion of these 401ks are worthless what’s going to happen? The taxpayer will compensate them and the PE firms will have made a fortune with guaranteed taxpayer funds. There will be a new PBGC covering 401ks.
The chairman of U.S. Steel went on national TV in September 2008 and blasted banks for shutting down his lines of credit, despite USX having a perfect credit history. Private equity literally kept the economy from crashing, as no banks were lending.
Please define “significant portion” and dollar amount of 401k investments that became “worthless” in 2008-2009. The default rate doubled in 2008 from 2007, from 0.97% to 1.92%. In 2009, the public junk bond market had a 13.7% default rate. The private credit default rate was half that, at 6.9%. Higher default rates translate into more employees fired.
Since 2015, private markets capital formation has outpaced global equity issuance in every year, and raised $10.95 trillion privately vs. $6.25 trillion in public markets in that 10-year span. In my opinion, the public stock markets are fake and ghey, trading at 21x earnings with 4x the volatility of private markets, whereas private companies are trading at 9x EBITDA. Evidently, businessmen running companies felt the same way, as $5 trillion more capital was raised at PE ratios at half what they could get on the public markets, i.e., $5 trillion less money in the owners’ pockets. Hmmm, I wonder why? The PE managers must bring a helluva lot more to the table than just capital. Hint: revisit the default rates above to understand why.
To be blunt, your PBGC scenario for 401k’s is insanely ignorant because each individual has sole discretion on the investments in his 401k. Private equity, if approved for 401k investors, will just be another option among many. Currently, the FED, SEC and FINRA have strict regulations on who can invest in private markets. For individuals, dependent on the particular fund, an individual must have a minimum liquid net worth of $25 million, $10 million, $5 million, $2.2 million or $1 million. Of all the individuals who fall into those net worth minimums, only 3% invest in private equity. I suspect it will be the same for 401k investors. Regardless, if a 401k investor blows up his portfolio, it’s his fault. No government entity or taxpayer money is going to rescue that unfortunate soul.
I agree with almost everything you said above which makes my point. Leave it as it is. The 401k investor can be free to invest in PE funds in a brokerage account if the funds allow it, eg through an ETF.
Regarding your comment “if a 401k investor blows up his portfolio, it’s his fault. No government entity or taxpayer money is going to rescue…”
Of course the government is going to step in. They always do. Why do you think we have forced participation in social security? Because no one would save for retirement otherwise.
How do you think we have accrued the $35 trillion in federal debt?
Honda Civics, I’m trying to be civil, but you do not understand what a 401k is.
No 401k investor in history has ever been bailed out by taxpayer money, and never will, unless the tax code changes and takes away the self-direction feature of 401ks. If fraud is involved, either the fraudster or the advisor who recommended the fraud will be held responsible, but no taxpayer money is going to make that 401k investor whole.
Does everything in America have to be dumbed down to the lowest common denominator? Give me and you the opportunity to invest in PE in my 401k. Neither of us have to. But like any other choice in a 401k, if it turns out to be a lousy investment, that’s my and your responsibility. Not “the tax payers.”
I understand what you’re saying but the reason why 401k’s are so restrictive is to avoid mass irrecoverable losses.
Are you essentially saying that all 401k’s should be self directed or that PE investments should be a limited or unlimited option in an employee retirement plan?
I suspect that a large number (most?) of retirement funds are held for people who pay more attention to the bottom line than to risk. Other people, who perhaps should know better, are driven by greed to understand but ignore risk. I agree with your point that when the savings of the numbers blow up, when the risk-takers as well as the innocents find themselves with no social security and the prospect of cat food for dinner, the government will save the day with its printing press. It ALWAYS is thus in the USA.
I agree in theory, but very few investors understand these instruments, they are hard to value and, as Michael D points out nearby, sophisticated investors use retail investors to cash out. Overall, pension money should remain in public regulated securities.
Yes, very few investors, and even fewer Substack authors, understand private equity. That’s why only 3% who qualify to invest in private equity do so. Michael D is full of crap—fraudsters, not “sophisticated” investors, use retail investors to cash out, and the fraudsters get caught.
What does “pension money should remain in public regulated securities” even mean? Pension funds have been investing in private equity for five decades, which is also regulated. Even the guy who wrote this article says pension money is invested in private equity, directly contradicting what he said at the beginning of the article. Maybe that’s what confused you.
You are correct. I really meant private retirement funds like IRA's and 401(k)'s. As you say, pensions do invest in exotic instruments but, in my experience, are pretty well regulated, with the exception of some union pensions.
Eric’s piece mentions PE’s “rightful position” as a ‘default’ investment for retirees who don’t direct their own portfolios. Treating the American worker as rubes seems like a bad ‘default’ position. Hopefully, the opt-in would involve a formal detailing of risk. Even with that, the potential for (another) catastrophe seems high.
100% agree. Whether covid response, free speech, or access to investments, it's all the same nanny state impulse we're fighting. We can't decry calling the average investor "dumb money," and on the other hand treat them as if they are dumb. And we can't decry all the big gains accrued by the 0.5%, and the on the other hand deny average people access to those investments.
I don't see the rules around investing in PE (assuming it's similar to hedge funds with asset and income thresholds) as "protecting" the average person; I see those existing rules as creating a protected market for the very wealthy. And their exclusion from employer-sponsored plans is more about protecting the employer than protecting the investors. Too much legal risk.
A good alternative would be to offer financial education to people as part of the 401k and give them the range of options. Require sign off on very explicit disclaimers re: the higher risk. Maybe only make PE available to higher earners as part of their exec ben packages as a test case.
For people with more money or for those making a solid income while young, PE could be a really good opportunity to accrue wealth quickly. What's so bad about that? I really don't get nanny state / leftist logic. Everything comes down to fear, feelings, and name-calling. "Private equity" = bad; Schwab mutual funds = good. I just don't get it.
Folks, if you don’t follow PE you might be surprised how mundane it can be. Warehouses. Apartments, Chain motel real estate. (Seriously, you’ve probably stayed at a Marriott or Holiday Inn whose real estate is PE-owned. Maybe an operating company now and then. And you can even take mezzanine debt if the idea of risk equity freaks you out. It’s not Wall Street, it’s more like Main Street. Keep the accredited investor thresholds (with inflation it’s getting easier to qualify every year) and it won’t be a problem.
The problem is when people have their retirement accounts sustaining huge losses the nanny state steps in. Look at recent trillion dollar problems. Student loans, mortgage defaults, Covid. The government steps in with taxpayer funded debt and distorts the free market. It’s almost a given. Don’t fall for it.
Also what finds do you think will be available for retail investors? The leftover garbage.
The same could be said for investing in a Russell index fund, or any "growth" mutual fund, or "emerging markets" fund. Tons of funds lose money ...and charge people a management fee to do so. Even buying a house as fixer-upper or investment property would have more risk. All could easily tank in value. "Private equity" is not some monolithic boogeyman hell-bent on stealing money. It's a way for small co's, startups, and companies tired of dealing with publicly traded rules to get funding.
“Covid response, Free speech, or Access to Investments” - one of these things is not like the other.
Marketing this as if you are “giving them access” or choice.
Ha. Why now after all these years? What’s changed?
The article claims “This happens to coincide with a period when private equity management firms are particularly desperate. Investors are clamoring for their money while funding for future investments is drying up. The PE industry may not respect the retail investor, but now it needs their cash as opposed to just wanting it.”
It's not "marketing." It's just a fact that the ultra-wealthy and connected have had access to investments that regular ppl have not had access to. This would be opening up a new choice. No one is saying this is mandatory.
Why shouldn't I be able to put some of my retirement savings into new ventures that are not yet publicly traded? What's so bad about giving people another choice of what to do with their own money?
Re: the article - yes, it's wrong. It's lumping all PE together in the same bucket, as if PE is one company or one entity acting in unison. (In reality they compete with each other and with other investment types.) And then it's presenting that strawman as if it's wantonly looking to take peoples' money while offering no benefit to them. (In reality, it's an investment in start-ups, small co's, and public co's that want to go private.) It's a caricature of an entire sector. Again, we're talking about investment in start-ups and companies that are not publicly traded. Things like SpaceX are funded by private equity. We're not talking about lottery tickets and gambling.
And, yes, the nanny state problem does apply to all 3 things. Covid response kept people from their jobs/businesses/incomes. Attacks on free speech kept people off platforms. The protectionist regulatory environment keeps average people from benefitting from certain types of investments. All of them forced upon people w/o their consent or desire, all of them taking away opportunities that people want.
All forms of gambling outside of Vegas and the Trump dumps on the Hudson were not too long ago...very illegal and considered the provence only of the louche and uncool.
Now? Sports gambling. State lotteries and scratch tickets. Casinos. Gambling spaces sponsored by private companies...
And along comes private equity with another knotted noose for Americans.
A prospectus on a PE offering would not require a track record. Any wording describing the venture is subject to possible false claims and misleading language. It’s the ole buyer be aware. How does one do research on a brand new enterprise?
I don't think we know what that looks like at this stage, so administrative details are just guesswork. However, if it's offered in a 401k it's going to have rules/regs around disclosure, and it's going to have been vetted by the employer, their consultant/broker, and the co. hosting the plan (Fidelity, Schwab, etc.). The consultant/broker has legal fiduciary responsibility to protect the employee. For 401k, my guess is that - if offered at all - PE would probably be offered as investment in books of business for selected PE firms, or some sort of PE fund, not individual investments in co's. In a 401k, certainly wouldn't be investments in individual unknown/unnamed co's.
If we're talking about the broader retail market (not 401k) then maybe there would be individual PE offerings. One would assume there'd be some sort of info available, otherwise, why invest at all? Who's going to plunk money into a black hole? If they do, then, yeah, caveat emptor.
However, there are already 100s of investment vehicles offered to retail investors that are riskier than PE investments. Some can not only lose the entire investment, but go negative and cause the investor to owe more on top of the 100% loss they sustained. And that's not even including shorts, puts, calls, etc., which are also available to retail. So, it's not like PE is some radically risky offering, even for retail.
Again, 401k’s are self-directed by each investor. There are dozens of regulations (not an exaggeration) to be approved as an investment option in a 401k. Each investor is responsible for his 401k’s investment choices.
Also, the myth that “retail investors” are dumb and suckers for the “sophisticated investors” is just that. A myth. DALBAR for years have tracked the investment performance of “retail vs institutional” investors, and the returns are near identical, often favoring the retail investor.
How can that be if the deck is stacked against the retail investor?
Investment decisions in institutions are made by people, too.
Some (many?) working class investors are better than some (many?) institutional investors.
Allowing private equity for 401k investors opens up a whole world of opportunity and risks.
Does everything in America have to be dumbed down to the lowest common denominator? Especially when the lowest common denominator is most likely the chairman of a foundation’s investment committee who’s former career was president of a woke university.
That IF is massive. Back in the .com boom I saw a large group of co workers moving their money into technology funds and were watching it grow and bragging about how much money they made the previous day, then the bubble burst. Opening the door for PE Vultures to fleece 401k’s would end in tears.
Mark, you’re describing human nature. Do we have to dumb everything down to the lowest common denominator? If you think PE exists to just “fleece 401k’s” don’t invest in it. I don’t want my investment options limited because of someone else’s irrational decisions.
Make sure your investment is beating the dow. The basic knowledge is "no one beats the dow". Then Google gold-vs-dow. You'll see that outside the dot-com bubble, gold is a better investment. Albeit we've just seen a large bump in gold value which may not be fully supported.
The moves by PE to suddenly “democratize” or “available to Main Street” etc is absolutely cynically timed to bail the late stage PE investors and fund promoters out. The insiders know that the BOOK value of their funds are grossly overstated and that only “dumb money” (or people who have felt left on the sidelines and have been anxious to find any way into these investment opportunities) will buy them at these prices. Authentic efforts to make “democratize” PE and VC investing should have been made nearly 20 years ago. There is limited low hanging fruit to be plucked at this point in the cycle.
The average enterprise value of private equity is 8x EBITDA. The S&P 500 is at 21x. There isn't a high quality company in the world trading at or below BOOK value. Those days ended in the early 1980s. High quality private equity companies are marked at a 60% discount to the S&P 500, and even larger discounts relative to their high quality public company counterparts because of the liquidity premium. It's why Warren Buffett has a 25% allocation to private equity. It's where the value is.
The PE world democratized in 1998 with feeder funds, dropping the minimum investment from $10 million to $250,000. Minimums have been dropping ever since, and an investor can access top quartile managers today with as little as $10,000. Was that cynically timed?
There is rarely any "low hanging fruit" in the highly competitive private equity world.
In short, you're just making stuff up about a sector you know nothing about.
As a former Trustee of a 401(k) plan and Pension fund (albeit small but the same regulations and responsibilities) I would find it impossible to add PE options to the portfolio. In my instance, my company was owned by PE and the risk/reward of that investment was apparent everyday. Even if PE gets its way, Trustees and fund managers have to think twice as they have fiduciary responsibilities they personally can be held accountable for…as Matt pointed out in the article. PE money is for big rollers that can afford the risk and afford the loss. It is not for the hard working person saving and building wealth for their retirement. Steady, repeatable returns with lower downside risk beats the high flyer investment almost every time…there are exceptions that everyone dreams about.
And when private equity opens it up to retail investors, retail investors will quickly discover that their PE money actually was only temporarily their PE money and that it really was just money that belonged, in the end, as the Finance Gods have ordained...back in the hands of private equity.
Agreed. No employees are clamoring for PE options in their 401k, and vanishingly few plan managers in corporate HR will be foolish enough to add PE choices to their plans even if it's legally allowed. So it really doesn't matter whether PE funds become allowed for 401k's. There's no pressure from anyone to add them, and plenty of CYA reasons to avoid them.
You seem like someone who could help educate a fiscal know-nothing like me, so I’ll point-out that this piece is by Eric Salzman. Honest mistake, since Matt has written so many perceptive finance articles.
Matching 401K plans offered by employers give the employee a range of options that vary from conservative to aggressive, to somewhere in-between. So, it's not as if the employees are forced to invest in PE offerings.
In self-directed 401K plans it's up to the individual to determine how conservative or aggressive they want to be.
So, I get Matt's point. But it's not as if people with 401K plans will be forced to invest in PE offerings.
Sorry, but individuals simply don’t understand complex investments. That’s why we have accredited investor requirements. It’s like giving children access to firearms and saying they can’t figure out how to use them safely.
That's true. One problem is that financial advisors often mischaracterize risk or don't understand it themselves. An example is mortgage securities in the early 2000's, which were rated AAA.
Most people can select their investments or advisors, so they have some control there. With respect to true pensions, e.g. union funds or government pensions, there is a board that picks the firms. Their investment results are usually monitored pretty carefully, but the pensionee has no control in that case as you say.
When it comes to pension fund managers look no further than the "Junk Bond King" Michael Milken and Drexel-Burnham-Lambert in the 1980's to see how badly things can go in a very short period of time.
Every one of those fund managers knew that Drexel was selling garbage, and they still allocated hundreds of millions towards those "high yield" bonds.
But they made sure that the right fund managers were getting under the table kickbacks, and then it became a feeding frenzy.
I disagree, Larry. Back then it was difficult to get financing if you were not a blue chip corporation, and junk credits opened up capital to many businesses which became successful. That's why high yield has become a staple of so many fixed income strategies.
Where the problem came in was that - I know this will shock you :) - brokers misrepresented the risk and the market then was pretty illiquid as you infer. Commissions were much higher to sell "junk" bonds, and many brokers responded to those incentives.
I was surprised how well it held up in 2008. I think it's because the size of the market and overall liquidity were far different than the early years. Preferred stocks did worse than high yield, not so much because of credit risk but more due to a lack of trading liquidity.
Personally, I think today's high yield market is much weaker from a credit risk perspective. If we have a severe economic contraction at some point, I think you could see an uncomfortably high default rate.
It is important for trustees to select a family of funds or individual funds that have a retirement glide pattern that makes sense for the employee population. Additionally EE’s typically select once and never (or very seldom) review and change their selections. I, we, amended the 401(k) plan that required EE’s to affirm their investment selections on an annual basis. We also at that time had investment advisors available, by appt, to advise EE’s based on age, yrs of service and financial goals. Some family of funds are more aggressive than others and it is important to provide individual funds within the family that cover all investment sectors. One size does not fit all.
As one of the dumb herd, I am dismayed by the corporate takeover of small family campgrounds and marinas and even our state parks. Our dwindling funds buy less every year. It’s no coincidence the rise of stealth vans and people living in cars. How about a reverse vehicle registration tied into your increasingly unaffordable insurance.
Yeah. People living in vans and cars is getting more noticeable. Out west, a couple told us they just move from campground to campground or disbursed camping when the time at each site , 2 weeks, times out. It’s 5 to 10 bucks a night. Many move to the desert areas then for winter. There are whole towns worth there. Some do this as choice but some can’t afford anything else. Also, one campground we enjoyed in Wisconsin (Door County) is now sky high in price after being bought out.
This is happening all over the country. Once affordable, long-stay, easily-accessed camping sites, will soon be unaffordable or out of reach for many.
Soon, I'm anticipating "bidding wars" to supercede the marketplace for any product or service worth more than $20. Paying $75 for a haircut, and then months later paying $15.
PE is apparently even buying up Little League teams. I don't know a class of people with less shame. The amount of suffering they've caused—albeit indirectly—to American society and culture cannot be overestimated. I'm not sure what daylight exists between these people/firms, and 'evil.'
If Americans are invested in Wall Street and rely on these investments for income, isn't that in a sense Communism with American characteristics? We all own it - only some more than others. We are also powerless to impact corporate decisions. But maybe if we start painting this 401k system with the red commie brush we can wake people up to it's inherent corruption.
I am nearing retirement - came into the working world at the advent of 401k and have seen my 'investments' halve three times. It's a casino for the wealthy to use working class money. Pension fund managers wielded clout, individual investors have none.
Nonsense. Investors control their investments. In a communist society the state makes all decisions and doles out to you what it wishes. It sounds like you’ve received bad investment advice, which I’m sorry to hear. The biggest challenge for individual investors is to find advisors who are both competent and ethical.
Yep! Thugs like Fink have put us pretty far down the devalued dollar road. Now that the dollar is just another shitcoin, all PE can hope for is to not be left holding the bag. They know the Eye of Sauron is blinking out.
What a PERFECT vehicle to park all of the Debt in! Brilliant 👏 I mean, Retirees, right? Dead soon yada yada, no debt! Yahoo! Saved by capitalism AGAIN 🙆
I worked for a company that was sold to PE. It is all about the EBITDA. Customers are second and employees a distant third. This was in the financial services space and it wasn't surprising as the ability to sell a company was getting very difficult because no one in the next generation could afford it. The majority that were younger and doing well had generally inherited it. (One of my wholesalers commented to me once when we were talking about it as the group who was "born on third base and thought they hit a triple" because they tended to be very arrogant.) But for those businesses that didn't have someone to pass it in to, PE looked like a good deal - after a lifetime of hard work, who doesn't want to see a little something for it? But it has gotten waaay out if control. It is one thing to have financial services in PE. Things like health-care are another.
Currently I work for a family owned construction business. Plenty of kids willing to lead it into the next Gen. I get emails all the time from this one guy, who somehow got my name, to contact him about selling out HVAC to a PE investor. Which to me says, okay we are scraping the bottom of the barrelI. I have been ignoring him. What I really want to do is to tell him to eff off , but maybe I will just send him this link.
In our area, PE firms have scooped up trades businesses like HVAC, plumbing and electrical. Prices go way up. But I’m not concerned. There are still plenty of independents who can undercut the PE firms and still make a good profit.
Thanks for just saying it straight. Yes, I agree. I am so sick of some people flying cover, making apologies, or just simply lying—hoping for some crumb handout for their obedience.
If Larry the Fink wants it, you know it's bad for America. Now for something that will help America - how about a rule banning private equity from the American private home market?
I agree Bruce. These guys are distorting the housing market for new buyers, to the detriment of the country.
Yes and housing is headed for another slump.
I don't want my money invested with firms over leveraged in real estate.
Why? What could go wrong? /s
lol
If rents are such that buying and managing homes with borrowed money makes sense, then the rich people that invest in PE funds would just buy the houses themselves if the PE funds couldn’t.
Financial institutions are merely bloodsucking intermediaries standing between someone’s money and an opportunity, arbitraging information inefficiencies, economy of scale and government handouts (lower borrowing costs). The intermediary can improve efficiency and the speed of market adjustment, but I can assure you there would be buyers for these homes in any case. We just had two decades of QE- too much money chasing assets.
How is such a ban legal or enforceable? Would banking private equity equate to banking any corporate ownership of private housing?
Corporations are fictional entities that exist at the sufferance of our government. They can prohibit such ownership - or use punitive tax rates to make it unpleasant.
Governments are fictional entities that exist at sufferance of their peoples.
Are you saying all corporate ownership of private housing should be banned? I couldn't hold a couple of rental properties in an LLC? I presume this wouldn't apply to multi tenant dwellings? Or do we somehow carve out private equity for different treatment?
All corporate ownership of single family homes. Not difficult.
So a few pissed off sole proprietors, does this also pure REITs out of business? What about bank ownership of homes in mortgage default? I'm no lawyer but I think you are; is this all reasonably workable?
Bank ownership of homes in default is a different issue as the ownership is temporary as the banks are looking to unload the property asap. They are simply holding the home as collateral on a loan that defaulted and not as an investment.
Thanks for this. It reminds me to have a talk with my investment manager and make certain he isn't putting my money into ESG graded funds or anything with PE buy-in.
That's the rational response. 401k's are self-directed, meaning you, the individual, has final say on how your savings are invested. If you do not want to invest in PE, don't. But why deny others the opportunity if they understand the risks?
Because as we should all have learned from the Great Recession when a significant portion of these 401ks are worthless what’s going to happen? The taxpayer will compensate them and the PE firms will have made a fortune with guaranteed taxpayer funds. There will be a new PBGC covering 401ks.
The chairman of U.S. Steel went on national TV in September 2008 and blasted banks for shutting down his lines of credit, despite USX having a perfect credit history. Private equity literally kept the economy from crashing, as no banks were lending.
Please define “significant portion” and dollar amount of 401k investments that became “worthless” in 2008-2009. The default rate doubled in 2008 from 2007, from 0.97% to 1.92%. In 2009, the public junk bond market had a 13.7% default rate. The private credit default rate was half that, at 6.9%. Higher default rates translate into more employees fired.
Since 2015, private markets capital formation has outpaced global equity issuance in every year, and raised $10.95 trillion privately vs. $6.25 trillion in public markets in that 10-year span. In my opinion, the public stock markets are fake and ghey, trading at 21x earnings with 4x the volatility of private markets, whereas private companies are trading at 9x EBITDA. Evidently, businessmen running companies felt the same way, as $5 trillion more capital was raised at PE ratios at half what they could get on the public markets, i.e., $5 trillion less money in the owners’ pockets. Hmmm, I wonder why? The PE managers must bring a helluva lot more to the table than just capital. Hint: revisit the default rates above to understand why.
To be blunt, your PBGC scenario for 401k’s is insanely ignorant because each individual has sole discretion on the investments in his 401k. Private equity, if approved for 401k investors, will just be another option among many. Currently, the FED, SEC and FINRA have strict regulations on who can invest in private markets. For individuals, dependent on the particular fund, an individual must have a minimum liquid net worth of $25 million, $10 million, $5 million, $2.2 million or $1 million. Of all the individuals who fall into those net worth minimums, only 3% invest in private equity. I suspect it will be the same for 401k investors. Regardless, if a 401k investor blows up his portfolio, it’s his fault. No government entity or taxpayer money is going to rescue that unfortunate soul.
I agree with almost everything you said above which makes my point. Leave it as it is. The 401k investor can be free to invest in PE funds in a brokerage account if the funds allow it, eg through an ETF.
Regarding your comment “if a 401k investor blows up his portfolio, it’s his fault. No government entity or taxpayer money is going to rescue…”
Of course the government is going to step in. They always do. Why do you think we have forced participation in social security? Because no one would save for retirement otherwise.
How do you think we have accrued the $35 trillion in federal debt?
Honda Civics, I’m trying to be civil, but you do not understand what a 401k is.
No 401k investor in history has ever been bailed out by taxpayer money, and never will, unless the tax code changes and takes away the self-direction feature of 401ks. If fraud is involved, either the fraudster or the advisor who recommended the fraud will be held responsible, but no taxpayer money is going to make that 401k investor whole.
Does everything in America have to be dumbed down to the lowest common denominator? Give me and you the opportunity to invest in PE in my 401k. Neither of us have to. But like any other choice in a 401k, if it turns out to be a lousy investment, that’s my and your responsibility. Not “the tax payers.”
I understand what you’re saying but the reason why 401k’s are so restrictive is to avoid mass irrecoverable losses.
Are you essentially saying that all 401k’s should be self directed or that PE investments should be a limited or unlimited option in an employee retirement plan?
9x EBITDA. Hmmm.
That's not what will happen with Trump in charge.
No but when the problem arises in 20-30 years a taxpayer bail out is inevitable. If the US is still solvent at that time.
I suspect that a large number (most?) of retirement funds are held for people who pay more attention to the bottom line than to risk. Other people, who perhaps should know better, are driven by greed to understand but ignore risk. I agree with your point that when the savings of the numbers blow up, when the risk-takers as well as the innocents find themselves with no social security and the prospect of cat food for dinner, the government will save the day with its printing press. It ALWAYS is thus in the USA.
Jajaja
I agree in theory, but very few investors understand these instruments, they are hard to value and, as Michael D points out nearby, sophisticated investors use retail investors to cash out. Overall, pension money should remain in public regulated securities.
Yes, very few investors, and even fewer Substack authors, understand private equity. That’s why only 3% who qualify to invest in private equity do so. Michael D is full of crap—fraudsters, not “sophisticated” investors, use retail investors to cash out, and the fraudsters get caught.
What does “pension money should remain in public regulated securities” even mean? Pension funds have been investing in private equity for five decades, which is also regulated. Even the guy who wrote this article says pension money is invested in private equity, directly contradicting what he said at the beginning of the article. Maybe that’s what confused you.
You are correct. I really meant private retirement funds like IRA's and 401(k)'s. As you say, pensions do invest in exotic instruments but, in my experience, are pretty well regulated, with the exception of some union pensions.
Eric’s piece mentions PE’s “rightful position” as a ‘default’ investment for retirees who don’t direct their own portfolios. Treating the American worker as rubes seems like a bad ‘default’ position. Hopefully, the opt-in would involve a formal detailing of risk. Even with that, the potential for (another) catastrophe seems high.
100% agree. Whether covid response, free speech, or access to investments, it's all the same nanny state impulse we're fighting. We can't decry calling the average investor "dumb money," and on the other hand treat them as if they are dumb. And we can't decry all the big gains accrued by the 0.5%, and the on the other hand deny average people access to those investments.
I don't see the rules around investing in PE (assuming it's similar to hedge funds with asset and income thresholds) as "protecting" the average person; I see those existing rules as creating a protected market for the very wealthy. And their exclusion from employer-sponsored plans is more about protecting the employer than protecting the investors. Too much legal risk.
A good alternative would be to offer financial education to people as part of the 401k and give them the range of options. Require sign off on very explicit disclaimers re: the higher risk. Maybe only make PE available to higher earners as part of their exec ben packages as a test case.
For people with more money or for those making a solid income while young, PE could be a really good opportunity to accrue wealth quickly. What's so bad about that? I really don't get nanny state / leftist logic. Everything comes down to fear, feelings, and name-calling. "Private equity" = bad; Schwab mutual funds = good. I just don't get it.
Folks, if you don’t follow PE you might be surprised how mundane it can be. Warehouses. Apartments, Chain motel real estate. (Seriously, you’ve probably stayed at a Marriott or Holiday Inn whose real estate is PE-owned. Maybe an operating company now and then. And you can even take mezzanine debt if the idea of risk equity freaks you out. It’s not Wall Street, it’s more like Main Street. Keep the accredited investor thresholds (with inflation it’s getting easier to qualify every year) and it won’t be a problem.
The problem is when people have their retirement accounts sustaining huge losses the nanny state steps in. Look at recent trillion dollar problems. Student loans, mortgage defaults, Covid. The government steps in with taxpayer funded debt and distorts the free market. It’s almost a given. Don’t fall for it.
Also what finds do you think will be available for retail investors? The leftover garbage.
The same could be said for investing in a Russell index fund, or any "growth" mutual fund, or "emerging markets" fund. Tons of funds lose money ...and charge people a management fee to do so. Even buying a house as fixer-upper or investment property would have more risk. All could easily tank in value. "Private equity" is not some monolithic boogeyman hell-bent on stealing money. It's a way for small co's, startups, and companies tired of dealing with publicly traded rules to get funding.
“Covid response, Free speech, or Access to Investments” - one of these things is not like the other.
Marketing this as if you are “giving them access” or choice.
Ha. Why now after all these years? What’s changed?
The article claims “This happens to coincide with a period when private equity management firms are particularly desperate. Investors are clamoring for their money while funding for future investments is drying up. The PE industry may not respect the retail investor, but now it needs their cash as opposed to just wanting it.”
Is that wrong?
It's not "marketing." It's just a fact that the ultra-wealthy and connected have had access to investments that regular ppl have not had access to. This would be opening up a new choice. No one is saying this is mandatory.
Why shouldn't I be able to put some of my retirement savings into new ventures that are not yet publicly traded? What's so bad about giving people another choice of what to do with their own money?
Re: the article - yes, it's wrong. It's lumping all PE together in the same bucket, as if PE is one company or one entity acting in unison. (In reality they compete with each other and with other investment types.) And then it's presenting that strawman as if it's wantonly looking to take peoples' money while offering no benefit to them. (In reality, it's an investment in start-ups, small co's, and public co's that want to go private.) It's a caricature of an entire sector. Again, we're talking about investment in start-ups and companies that are not publicly traded. Things like SpaceX are funded by private equity. We're not talking about lottery tickets and gambling.
And, yes, the nanny state problem does apply to all 3 things. Covid response kept people from their jobs/businesses/incomes. Attacks on free speech kept people off platforms. The protectionist regulatory environment keeps average people from benefitting from certain types of investments. All of them forced upon people w/o their consent or desire, all of them taking away opportunities that people want.
All forms of gambling outside of Vegas and the Trump dumps on the Hudson were not too long ago...very illegal and considered the provence only of the louche and uncool.
Now? Sports gambling. State lotteries and scratch tickets. Casinos. Gambling spaces sponsored by private companies...
And along comes private equity with another knotted noose for Americans.
PE is not - at all - the same as sports gambling, lottery tickets, or casinos, etc.
A prospectus on a PE offering would not require a track record. Any wording describing the venture is subject to possible false claims and misleading language. It’s the ole buyer be aware. How does one do research on a brand new enterprise?
I don't think we know what that looks like at this stage, so administrative details are just guesswork. However, if it's offered in a 401k it's going to have rules/regs around disclosure, and it's going to have been vetted by the employer, their consultant/broker, and the co. hosting the plan (Fidelity, Schwab, etc.). The consultant/broker has legal fiduciary responsibility to protect the employee. For 401k, my guess is that - if offered at all - PE would probably be offered as investment in books of business for selected PE firms, or some sort of PE fund, not individual investments in co's. In a 401k, certainly wouldn't be investments in individual unknown/unnamed co's.
If we're talking about the broader retail market (not 401k) then maybe there would be individual PE offerings. One would assume there'd be some sort of info available, otherwise, why invest at all? Who's going to plunk money into a black hole? If they do, then, yeah, caveat emptor.
However, there are already 100s of investment vehicles offered to retail investors that are riskier than PE investments. Some can not only lose the entire investment, but go negative and cause the investor to owe more on top of the 100% loss they sustained. And that's not even including shorts, puts, calls, etc., which are also available to retail. So, it's not like PE is some radically risky offering, even for retail.
401k s are a government construct, it is a huge proportion of American savings.
That money props up the dollar.
The government should do its best to protect that money.
Without it there is no dollar hegemony.
Unfortunately our government has a dismal history of protecting the working class money.
Again, 401k’s are self-directed by each investor. There are dozens of regulations (not an exaggeration) to be approved as an investment option in a 401k. Each investor is responsible for his 401k’s investment choices.
Also, the myth that “retail investors” are dumb and suckers for the “sophisticated investors” is just that. A myth. DALBAR for years have tracked the investment performance of “retail vs institutional” investors, and the returns are near identical, often favoring the retail investor.
How can that be if the deck is stacked against the retail investor?
Investment decisions in institutions are made by people, too.
Some (many?) working class investors are better than some (many?) institutional investors.
Allowing private equity for 401k investors opens up a whole world of opportunity and risks.
Does everything in America have to be dumbed down to the lowest common denominator? Especially when the lowest common denominator is most likely the chairman of a foundation’s investment committee who’s former career was president of a woke university.
I get all that.
My question, how far should the regulations go trying to protect what is a grave national interest?
David, if something causes the entire $44.1 trillion 401k market to implode, money will be the very last thing you or I will be worried about.
How bout 20% ?
That IF is massive. Back in the .com boom I saw a large group of co workers moving their money into technology funds and were watching it grow and bragging about how much money they made the previous day, then the bubble burst. Opening the door for PE Vultures to fleece 401k’s would end in tears.
Mark, you’re describing human nature. Do we have to dumb everything down to the lowest common denominator? If you think PE exists to just “fleece 401k’s” don’t invest in it. I don’t want my investment options limited because of someone else’s irrational decisions.
Spot on!
Make sure your investment is beating the dow. The basic knowledge is "no one beats the dow". Then Google gold-vs-dow. You'll see that outside the dot-com bubble, gold is a better investment. Albeit we've just seen a large bump in gold value which may not be fully supported.
The moves by PE to suddenly “democratize” or “available to Main Street” etc is absolutely cynically timed to bail the late stage PE investors and fund promoters out. The insiders know that the BOOK value of their funds are grossly overstated and that only “dumb money” (or people who have felt left on the sidelines and have been anxious to find any way into these investment opportunities) will buy them at these prices. Authentic efforts to make “democratize” PE and VC investing should have been made nearly 20 years ago. There is limited low hanging fruit to be plucked at this point in the cycle.
The average enterprise value of private equity is 8x EBITDA. The S&P 500 is at 21x. There isn't a high quality company in the world trading at or below BOOK value. Those days ended in the early 1980s. High quality private equity companies are marked at a 60% discount to the S&P 500, and even larger discounts relative to their high quality public company counterparts because of the liquidity premium. It's why Warren Buffett has a 25% allocation to private equity. It's where the value is.
The PE world democratized in 1998 with feeder funds, dropping the minimum investment from $10 million to $250,000. Minimums have been dropping ever since, and an investor can access top quartile managers today with as little as $10,000. Was that cynically timed?
There is rarely any "low hanging fruit" in the highly competitive private equity world.
In short, you're just making stuff up about a sector you know nothing about.
As a former Trustee of a 401(k) plan and Pension fund (albeit small but the same regulations and responsibilities) I would find it impossible to add PE options to the portfolio. In my instance, my company was owned by PE and the risk/reward of that investment was apparent everyday. Even if PE gets its way, Trustees and fund managers have to think twice as they have fiduciary responsibilities they personally can be held accountable for…as Matt pointed out in the article. PE money is for big rollers that can afford the risk and afford the loss. It is not for the hard working person saving and building wealth for their retirement. Steady, repeatable returns with lower downside risk beats the high flyer investment almost every time…there are exceptions that everyone dreams about.
Of course PE money is for high rollers!
And when private equity opens it up to retail investors, retail investors will quickly discover that their PE money actually was only temporarily their PE money and that it really was just money that belonged, in the end, as the Finance Gods have ordained...back in the hands of private equity.
Agreed. No employees are clamoring for PE options in their 401k, and vanishingly few plan managers in corporate HR will be foolish enough to add PE choices to their plans even if it's legally allowed. So it really doesn't matter whether PE funds become allowed for 401k's. There's no pressure from anyone to add them, and plenty of CYA reasons to avoid them.
You seem like someone who could help educate a fiscal know-nothing like me, so I’ll point-out that this piece is by Eric Salzman. Honest mistake, since Matt has written so many perceptive finance articles.
Matching 401K plans offered by employers give the employee a range of options that vary from conservative to aggressive, to somewhere in-between. So, it's not as if the employees are forced to invest in PE offerings.
In self-directed 401K plans it's up to the individual to determine how conservative or aggressive they want to be.
So, I get Matt's point. But it's not as if people with 401K plans will be forced to invest in PE offerings.
But pension funds are another story.
Sorry, but individuals simply don’t understand complex investments. That’s why we have accredited investor requirements. It’s like giving children access to firearms and saying they can’t figure out how to use them safely.
Ok. But individuals know the meaning of conservative versus aggressive. So, they do have a choice.
It's the pension fund managers that have sole discretion that are worrisome.
That's true. One problem is that financial advisors often mischaracterize risk or don't understand it themselves. An example is mortgage securities in the early 2000's, which were rated AAA.
Most people can select their investments or advisors, so they have some control there. With respect to true pensions, e.g. union funds or government pensions, there is a board that picks the firms. Their investment results are usually monitored pretty carefully, but the pensionee has no control in that case as you say.
When it comes to pension fund managers look no further than the "Junk Bond King" Michael Milken and Drexel-Burnham-Lambert in the 1980's to see how badly things can go in a very short period of time.
Every one of those fund managers knew that Drexel was selling garbage, and they still allocated hundreds of millions towards those "high yield" bonds.
But they made sure that the right fund managers were getting under the table kickbacks, and then it became a feeding frenzy.
I disagree, Larry. Back then it was difficult to get financing if you were not a blue chip corporation, and junk credits opened up capital to many businesses which became successful. That's why high yield has become a staple of so many fixed income strategies.
Where the problem came in was that - I know this will shock you :) - brokers misrepresented the risk and the market then was pretty illiquid as you infer. Commissions were much higher to sell "junk" bonds, and many brokers responded to those incentives.
I was surprised how well it held up in 2008. I think it's because the size of the market and overall liquidity were far different than the early years. Preferred stocks did worse than high yield, not so much because of credit risk but more due to a lack of trading liquidity.
Personally, I think today's high yield market is much weaker from a credit risk perspective. If we have a severe economic contraction at some point, I think you could see an uncomfortably high default rate.
It is important for trustees to select a family of funds or individual funds that have a retirement glide pattern that makes sense for the employee population. Additionally EE’s typically select once and never (or very seldom) review and change their selections. I, we, amended the 401(k) plan that required EE’s to affirm their investment selections on an annual basis. We also at that time had investment advisors available, by appt, to advise EE’s based on age, yrs of service and financial goals. Some family of funds are more aggressive than others and it is important to provide individual funds within the family that cover all investment sectors. One size does not fit all.
💯
My dad used to say, “nothing good happens after midnight.” Sounds like we were raised right, Matt!
Yeah, midnight is what I always heard. At 3am, I was getting up to throw newspapers.
What's a newspaper?
Newspaper delivery was my job when in high school.
I know, I know, now you'll have to ask, "What's a job?"
It’s that stuff at the bottom of the bird cage.
My mother said that.
My mom was strict. She said nothing good happens after 11 PM.
If you don't even know who wrote the article (it's in the byline!), you definitely shouldn't be making any financial decisions.
Only good thing that happens at 3am, no knock warrants.
As one of the dumb herd, I am dismayed by the corporate takeover of small family campgrounds and marinas and even our state parks. Our dwindling funds buy less every year. It’s no coincidence the rise of stealth vans and people living in cars. How about a reverse vehicle registration tied into your increasingly unaffordable insurance.
Yeah. People living in vans and cars is getting more noticeable. Out west, a couple told us they just move from campground to campground or disbursed camping when the time at each site , 2 weeks, times out. It’s 5 to 10 bucks a night. Many move to the desert areas then for winter. There are whole towns worth there. Some do this as choice but some can’t afford anything else. Also, one campground we enjoyed in Wisconsin (Door County) is now sky high in price after being bought out.
This is happening all over the country. Once affordable, long-stay, easily-accessed camping sites, will soon be unaffordable or out of reach for many.
Soon, I'm anticipating "bidding wars" to supercede the marketplace for any product or service worth more than $20. Paying $75 for a haircut, and then months later paying $15.
PE is apparently even buying up Little League teams. I don't know a class of people with less shame. The amount of suffering they've caused—albeit indirectly—to American society and culture cannot be overestimated. I'm not sure what daylight exists between these people/firms, and 'evil.'
The last 2 companies I worked for before I retired were owned by PE firms. The last thing I want is for them to be ANYWHERE near my retirement funds.
Hah. Same for me.
If Americans are invested in Wall Street and rely on these investments for income, isn't that in a sense Communism with American characteristics? We all own it - only some more than others. We are also powerless to impact corporate decisions. But maybe if we start painting this 401k system with the red commie brush we can wake people up to it's inherent corruption.
I am nearing retirement - came into the working world at the advent of 401k and have seen my 'investments' halve three times. It's a casino for the wealthy to use working class money. Pension fund managers wielded clout, individual investors have none.
Nonsense. Investors control their investments. In a communist society the state makes all decisions and doles out to you what it wishes. It sounds like you’ve received bad investment advice, which I’m sorry to hear. The biggest challenge for individual investors is to find advisors who are both competent and ethical.
Yep! Thugs like Fink have put us pretty far down the devalued dollar road. Now that the dollar is just another shitcoin, all PE can hope for is to not be left holding the bag. They know the Eye of Sauron is blinking out.
Let them bleed out so that we can reclaim all the assets these leeches have sucked from the middle class working stiff.
What a PERFECT vehicle to park all of the Debt in! Brilliant 👏 I mean, Retirees, right? Dead soon yada yada, no debt! Yahoo! Saved by capitalism AGAIN 🙆
Blackrock should set-up kiosks outside of payday-loan joints.
Great article Matt! Gets to the point in a clear and entertaining way, typical ;-) I will be wary of this "new" way to invest our life savings!
I worked for a company that was sold to PE. It is all about the EBITDA. Customers are second and employees a distant third. This was in the financial services space and it wasn't surprising as the ability to sell a company was getting very difficult because no one in the next generation could afford it. The majority that were younger and doing well had generally inherited it. (One of my wholesalers commented to me once when we were talking about it as the group who was "born on third base and thought they hit a triple" because they tended to be very arrogant.) But for those businesses that didn't have someone to pass it in to, PE looked like a good deal - after a lifetime of hard work, who doesn't want to see a little something for it? But it has gotten waaay out if control. It is one thing to have financial services in PE. Things like health-care are another.
Currently I work for a family owned construction business. Plenty of kids willing to lead it into the next Gen. I get emails all the time from this one guy, who somehow got my name, to contact him about selling out HVAC to a PE investor. Which to me says, okay we are scraping the bottom of the barrelI. I have been ignoring him. What I really want to do is to tell him to eff off , but maybe I will just send him this link.
In our area, PE firms have scooped up trades businesses like HVAC, plumbing and electrical. Prices go way up. But I’m not concerned. There are still plenty of independents who can undercut the PE firms and still make a good profit.
Markets crash for any number of reasons. Economies collapse because of illiquidity.
Who has been buying enormous quantities of housing and real estate, forcing prices into the stratosphere and creating vast amounts of illiquidity?
Blackrock, Vanguard, et al can go f**k themselves.
Thanks for just saying it straight. Yes, I agree. I am so sick of some people flying cover, making apologies, or just simply lying—hoping for some crumb handout for their obedience.