Would You Like Some PE in Your 401(k)?

Private equity firms have their eyes on the trillions in savings plans | “We think about it every day,” says a KKR executive

Margaret Collins and Devin Banerjee

Private equity firms, the exclusive money managers overseeing $3 trillion worldwide for wealthy investors, are taking preliminary steps to target a new type of client: ordinary people. Carlyle Group and KKR, which usually require clients to commit at least $5 million, are lowering that threshold or starting funds that can be sold directly to individuals. Blackstone Group is developing similar products, according to a person familiar with the plans, who asked not to be named because final decisions on such products haven’t been made. Their ultimate goal is a slice of the $3.57 trillion Americans have accumulated in their 401(k) retirement plans. “We definitely would like to be part of 401(k) platforms,” says Michael Gaviser, a managing director responsible for individual investor products at KKR. “We think about it every day.”

To succeed, managers will have to overcome regulatory hurdles that ban them from selling to the masses. Under Securities and Exchange Commission rules, private equity funds are available only to accredited investors, generally defined as those with a net worth excluding primary residence of more than $1 million, or those earning more than $200,000 annually.

The managers will also have to convince savers that their returns justify the higher fees. Private equity firms aim to buy companies, improve their value, and sell them for a profit, using debt to finance the deals and amplify returns. They typically lock up investors’ money for 10 years, charge an annual management fee equal to 1.5 percent to 2 percent of committed funds, and keep 20 percent of profit from investments. From 2002 through 2012, private equity funds returned an average of 14 percent after fees, according to research firm PitchBook Data. U.S. stock funds gained an annualized 8.4 percent on average, and bond funds rose 5 percent a year, according to Morningstar.

While private equity funds are a staple of many large pension plans, making them available to individuals poses dangers because they’re hard to understand and illiquid, and their fees are higher than those of traditional mutual funds, says David John, deputy director of the Retirement Security Project at the Brookings Institution. “Should this start to take hold,” he says, “there needs to be either a licensing, a seal of approval, or some level of higher oversight so people don’t find that they are investing in something that really isn’t suitable for their stage of life.”

KKR last year started two debt funds for individual investors. The KKR Alternative High Yield Fund, which became available in November, is a conventional mutual fund with a $2,500 minimum investment. The KKR Alternative Corporate Opportunities Fund is a closed-end fund with a minimum investment of $25,000 that permits withdrawals every three months. The funds invest in assets such as high-yield bonds and bank loans. KKR is close to being able to add the high-yield fund to the 401(k) it offers its own employees, which is administered by Fidelity, according to a person familiar with KKR’s plans. The firm views that as a step toward offering the investments to other Fidelity 401(k)-plan participants, says the person, who asked not to be identified because the information isn’t public. A Fidelity spokeswoman declined to comment on the matter.

Blackstone, the world’s largest manager of alternative assets such as private equity, real estate, and hedge funds, is developing products that would be suitable for individual investors, according to a person familiar with the company’s plans. A spokeswoman for Blackstone declined to comment.

Carlyle expects its products eventually to reach 401(k) plans, according to a person with knowledge of the firm’s strategy, who asked not to be identified because the matter is private. Carlyle, together with investment firm Central Park Group, is starting a fund that will accept as little as $50,000 from accredited investors, according to a January regulatory filing. The money in the fund will be invested in other funds Carlyle manages, where the minimum investment is typically $5 million to $20 million.

The likely entry point for private equity firms seeking access to 401(k)s is target-date funds, the most common default option for employees joining the plans, says Lori Lucas, defined-contribution practice leader at consultant Callan Associates. Target-date funds usually hold a mix of investments to which an alternative product could be added, Lucas says. That won’t happen anytime soon: BlackRock, Fidelity, T. Rowe Price Group, and Vanguard, four of the largest providers of target-date funds in 401(k)‌s, say they have no imminent plans to add private equity or hedge funds.

The private equity industry is taking the long view. “I believe in the future nonaccredited investors will ultimately be able to invest in private equity,” David Rubenstein, Carlyle’s co-founder, said in a September 2012 interview on Bloomberg Radio. “It will be possible in the future” for 401(k) participants to put a portion of their money each year “into an illiquid private equity fund.”

The bottom line Target-date funds might be the point of entry for private equity firms hoping to tap the $3.57 trillion in 401(k) retirement plans.


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