Private Equity Sets Its Sites On A New Funding Victim: Mom-And-Pop 401(k)s

After laying ruin to the defined-benefit pension plans of public and private employees over the past several decades, Wall Street has its sites set on its next victim: mom-and-pop 401(k)s.  Sure, because as our recent headlines confirm, wall street money managers have worked wonders for public/private pension funds:

• Are Collapsing Pensions “About To Bring Hell To America”?
• How Chicago’s Largest Pension May Run Out Of Cash In As Little As 4 Years
• NY Teamsters Pension Becomes First To Run Out Of Money As Expert Warns “Pension Tsunami” Is Coming
• Dallas Police Pension On Verge Of Collapse As Record Number Of Cops Seek Full Withdrawals

Alas, with companies increasingly opting for defined-contribution retirement plans (401k’s) in-lieu of defined benefit plans, combined with the trillions of dollars of losses that wall street has racked up for the nation’s largest pensions, it’s no wonder that ‘millionaire, billionaire, private jet owners’, like Stephen Schwarzman of Blackstone, are looking to get their ‘fair share’ of fees from America’s $4.8 trillion in 401(k) assets.

As Schwarzman told Bloomberg, “you have to have a dream,” and his dream is to apparently lay waste to a whole new pocket of American retirement wealth.

Today most mom-and-pop investors still don’t have that option. But a shift in how people are saving in their 401(k)s may give private equity a new way in — keeping firms like Carlyle, Blackstone Group LP and KKR & Co. eyeing the $4.8 trillion that U.S. workers have saved in their 401(k)s.

“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 alternative-investment 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 401(k)s. Such retirement plans value assets on a daily basis, presenting a challenge for private equity firms that hold dozens of years-long 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.

Inflows into private-sector 401(k)s have outpaced 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 $349 billion into 401(k)s in 2014, more than 3.5 times the volume that flowed into pensions, the data show.

And while private equity has largely been shunned by smaller investors due to illiquidity and high fees, a lesson that many so-called ‘sophisticated’ institutional investors could afford to learn, we have no doubt that they will ultimately find a way to plunder such a highly-coveted asset.

Some firms including New York-based KKR are hoping to score retirement money through an effort started by Pantheon Ventures, a London-based private equity firm that’s trying to get companies with 401(k)s more comfortable with the asset class. Companies are afraid of adding private equity because they can be sued by employees for offering complex products that charge higher fees.

To address the fear, Pantheon offers performance-based pricing on its fund-of-funds strategy: The firm earns a fee when performance exceeds the S&P 500 and returns money if it lags. Pantheon will mix private equity investments managed by KKR and other firms with cash and shares of an S&P 500 exchange-traded fund to offset liquidity concerns. It’s also developed a model to help value assets on a daily basis.

“Fundraising is all about knocking down barriers,” said Kevin Albert, Pantheon’s global head of business development. “They say they don’t want to invest with you because of one reason, so you fix it and keep reiterating.”

“Dream big,” Steve Schwarzman…how else are you going to be able to afford that new Lambo for the Hamptons house?