Widening Access to Private Assets for Ordinary Americans Raises Concerns

Strategic Insights -

As the Securities and Exchange Commission rethinks rules limiting funds with more than 15% in private assets to wealthy investors, ordinary Americans may soon gain access to investment opportunities previously reserved for billionaires and institutional investors. However, with the private equity sector experiencing declining returns and struggling to sell assets, experts warn that retail investors may be in for a rough ride.

Key Takeaways:

  • The private equity (PE) sector has grown significantly, with assets topping $4.7 trillion last year, nearly twice the total in 2019.
  • The White House may make it easier for corporate 401(k) plans to invest in private assets, which could total $9 trillion in the retirement market.
  • Retail investors may be less knowledgeable about private assets and may pay higher fees for lower returns, making them a potential "dumping ground" for struggling companies.
  • Target date funds, which invest in a variety of assets and become less risky as retirement approaches, may be used to invest in private assets, but this could increase fees.
  • Analysts predict that switching 15% of assets in a target date fund could push up fees by between 30 and 100 basis points per year.
  • The average expense ratio for target date funds is 68 basis points, and Vanguard and State Street charge less than 10 basis points.

Statistics:

  • The private equity sector has quintupled in size since the early 2000s.
  • PE assets totaled $4.7 trillion last year, nearly twice the total in 2019.
  • The average expense ratio for target date funds is 68 basis points.
  • Target date funds charge between 30 and 100 basis points per year more for private assets.
  • Early "hardship" withdrawals from 401(k) plans have doubled in five years to 4.8 percent.

Sources:

Brooke Masters, "America's Rich List: Covert Culture War drags on," Financial Times, 2022.

Highland Global Advisors' Michael Pedroni, former US Treasury official.

Thoma Bravo founder Orlando Bravo, warning about the potential risks of retail private funds.