Tag: 401k investments

Private Equity Coming to Your 401(k)?

401k

Private equity has become a staple in defined-benefit plans around the world. But it’s becoming increasingly common for employers to phase out defined-benefit plans and shift new hires into defined-contribution systems.

Accordingly, private equity funds are now setting their sights on 401(k) plans. Daisy Maxey writes in the Wall Street Journal:

Some big names of the private-equity world are working to make private-equity funds an option in defined-contribution retirement plans, such as 401(k)s, as soon as next year.

Pantheon Ventures LLP, a private-equity fund investor overseeing $30.5 billion, is shopping its plan to offer a private-equity product to defined-contribution plans. The firm is in talks with plan sponsors, and anticipates striking a deal to bring the product to defined-contribution plans next year, says Michael Riak, head of the firm’s U.S. defined-contribution business.

…Private-equity investments are already offered within some defined-contribution plans, though that is rare and the products don’t offer daily pricing and liquidity, says David O’Meara, a senior investment consultant at Towers Watson Investment Services.

Private equity isn’t being welcomed into defined-contribution plans with open arms—plan sponsors maintain skepticism that those investments are the right fit for 401(k) plans.

But those in the private equity field think some plan sponsors will soon change their tune, especially if they’ve dealt with private equity in the course of administering defined-benefit plans. From the WSJ:

Though some asset managers, such as Pantheon, have the products ready to go, and are now looking for plan sponsors to participate, there remains some healthy skepticism within the 401(k) marketplace, he said.

“I would presume that the early adopters of private equity in defined-contribution plans would be large plan sponsors that have used private equity within their defined-benefit plans historically, and understand the asset class and how to evaluate its risks and returns,” he said.

Private Equity Sets Sights on 401(k)s

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Private equity funds have been a staple of the investments of defined-benefit plans for decades. But as the prominence of defined-benefit plans diminish and defined-contribution plans rise in their place, private equity firms now have their eyes on another prize: 401(k)s.

So said several major private equity players who spoke as part of a panel discussion at the Fifth Annual Innovative Alternative Investment Strategies Conference on Thursday.

From Financial Advisor magazine:

[Red Rocks Capital co-founder Mark] Sunderhuse sees big opportunity for private equity in the defined contribution space. “Target-date plans will use private equity,” he said. “There’s a lot of work with consultants going on, and different types of products will fit different boxes. We’ve had conversations with a number of people in more mainstream mutual fund-type formats where they’ll use it [the Red Rocks fund]. Our product is primarily used in investment models where people want private equity exposure in way where they can manage the risk and be able to reallocate it and rebalance it.”

Kevin Albert, a partner at Pantheon, a global private equity investment company, said U.S. public pension plans on average have 10 percent of their assets in private equity. But defined benefit pension plans are becoming dinosaurs both in the U.S. and abroad.

“That has motivated the best firms in the private equity industry to raise capital from other sources, and the two biggest other sources are defined contribution plans and private affluent investors,” Albert said. “And that’s a good thing because 15 years ago it was hard to convince a top 10 private equity fund to raise a feeder fund or to participate in an offering that would go to individual investors. They saw it as less prestigious, and viewed it as more complicated from a regulatory perspective.

“Now you’re seeing firms like Carlyle, KKR and Blackstone at the vanguard of this,” he continued. “So I think we’re in the middle of an amazing revolution in the repackaging of private equity to make it attractive to defined contribution plans, which have different needs and desires than defined benefit plans did. So I think that will be a meaningful difference in this industry from five, 10, 15 years ago.”

The discussion came up when the panelists were asked to explain a few key trends they see playing out in private equity in the next five years.

 

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