Schwarzman’s ‘dream’ tested, private equity eyes your nest egg
PRIVATE equity firms are good at solving complex problems. What’s stumping them? Normal people.
Five years ago, Carlyle Group’s David Rubenstein predicted a future where ordinary savers would be able to invest in private equity, an industry limited to wealthy individuals and institutions. He later suggested that by now, Americans would be able to put some of their retirement fund accounts into the asset class.
Today most mom-and-pop investors still don’t have that option. But a shift in how people are saving in their retirement fund accounts may give private equity a new way in – keeping firms like Carlyle, Blackstone Group LP and KKR Co. eyeing the US$ 4.8 trillion ( RM21 trillion) that US workers have saved in their retirement fund acounts. “In life you have to have a dream,” Steve Schwarzman, Blackstone’s chief executive officer, said on a call with analysts in January. “And one of the dreams is our desire – and the market’s need – to have more access” between alternativeinvestment funds and ordinary savers. It was a bold and telling statement coming from the helm of the world’s largest private equity firm.
Offering private equity to individuals has been a challenge because the investments are often hard to convert to cash quickly and they charge fees higher than those of traditional mutual funds that populate retirement funds. Such retirement plans value assets on a daily basis, presenting a challenge for private equity firms that hold dozens of yearslong investments. While private equity’s pitch is that it offers greater returns than traditional mutual funds, it may be hard to ensure each plan participant gets the best of what the asset class has to offer.
“There’s a lot of sensitivity to fees, and you’d need to demonstrate a huge amount of alpha to a participant to justify putting private equity in a plan,” said Brooks Herman, head of data and research at BrightScope Inc., which rates retirement plans. “You’re holding an asset that can be less transparent with its holdings, and the returns can be staggering in their difference between top quartile and bottom.”
Private equity is tackling retirement funds barriers as ordinary savers increasingly become the investors of their own retirement. Before, many employers would manage retirement funds for employees through definedbenefit pensions, allocating a pool of employee funds to a mix of assets – including private equity. Today, many employers are instead opting for defined- contribution plans like retirement fund accounts, making individuals responsible for funding their accounts and picking investments.
Inflows into private- sector retirement funds have out-paced those into corporate pensions every year since 1987, according to 2014 figures, the latest available from Department of Labor data tabulated by the Investment Company Institute. Americans and their employers put US$ 349 billion into retirement funds in 2014, more than 3.5 times the volume that flowed into pensions, the data show. — WP-Bloomberg