The Atlanta Journal-Constitution
Feds ease private equity rules
401(k) managers mum on whether they’ll pool with high-end plans.
Everyday investors may soon be able to get a piece of private equity action.
The Department of Labor has issued a letter that clarifies how, under existing rules, certain retirement plan sponsors, including 401(k)s, can put money into private equity investments that are usually reserved for the superrich and big institutional investors.
Labor Secretary Eugene Scalia said the new guidance “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.”
But it’s unclear how quickly the managers of big retirement plans will embrace private-equity investments. Vanguard, one of the largest managers of 401(k) plans in the country, declined to comment on the letter. Another major manager, Fidelity, did not respond to a request for comment.
Consumer advocates and some regulators have been wary of giving ordinary investors broader access to investments in businesses that do not adhere to the same disclosure rules as public companies and that could put them at risk.
Even without access to this untapped pool of capital, private equity managers have been able to raise record amounts in recent years. Fund managers in
the United States had access to $914 billion as of mid-May, according to investment data firm Preqin.
Many of those dollars come from wealthy clients, but big pension funds also put their money into funds managed by private equity firms.
But the move away from traditional pensions and into defined contribution plans means most retail investors don’t have access to those kinds of investments, which proponents say can provide added diversification to an investment portfolio.
“This is a positive step toward helping more Americans gain access to private equity investment,” Drew Maloney, chief executive of the American Investment Council, which represents the private equity industry, said in a statement
Private equity investments in new startups or in growth businesses can produce high returns. The private equity funds in the top 25% for performance earned at least 16.2% over the 10 years that ended in September 2018, according to PitchBook.
The private marketplace has become increasingly important as startups stay private longer. Also, there are half as many public companies as there were two decades ago, leaving fewer places for everyday investors to store their money.
The Labor Department outlined the new guidance in coordination with the Securities and Exchange Commission. Jay Clayton, the commission’s chairman, said in the statement that the clarification “will provide our longterm Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies.”
The SEC has supported giving smaller investors access to private equity through special investment vehicles that might work like mutual funds. Right now, only accredited investors — those with at least $1 million in assets, not including their home, or $200,000 in annual income — can participate in private equity deals.