The $12.5 trillion 401(k) market has been walled off from private equity (“PE”) for decades.

But with President Donald Trump’s new executive order, asset managers are lining up access PE investments that were once-exclusive to pensions and endowments.

BlackRock (BLK), Empower, Blue Owl (OWL), and many others are preparing new investment products for plan sponsors.

It sounds like a populist win. After all, regular investors are gaining access to potentially high-return vehicles once reserved for billionaires. But something doesn’t add up.

As Washington rolls out the red carpet for retail capital, the institutional money is heading for the exits.

According to global investment firm Cambridge Associates, American PE companies delivered average annual returns of 14.3% over the past two decades. That’s far above the 8.1% return for global equities in the same period.

But this data doesn’t take into account recent institutional behavior.

The TwinFocus wealth advisory firm points to a sharp drop in internal rates of return, especially among PE investments released in the past few years.

Many of the factors that once powered PE returns are gone. PE firms used to be able to rely on cheap debt, interest rates are much higher today.

Cheap debt in turn made it easy to buy struggling businesses and make them more profitable, and firms could then sell the stronger business to a competitor, an industry peer, or to investors through an IPO.

But demand for these kinds of transactions isn’t what it used to be.

That has led to PE firms holding onto the companies they bought longer than ever before.

Blackstone (BX) and Apollo Global (APO), for example, have shifted toward semi-liquid products. These offer more flexibility and transparency than traditional funds.

This exposes the problem of putting PE into 401(k)s.

PE investment vehicles are opaque, meaning they’re difficult to value. They now also involve long holding periods and hefty fees.

All of this is hard to justify under retail fiduciary standards.

PE might still work for university endowment. But it’s a dangerous match for a retiree relying on quarterly statements and liquidity.

Pensions, sovereign wealth funds, and insurance companies are pulling back and PE firms are desperate to replace those sources of capital. That’s why they’re pushing into retirement territory.

The same factors that once made PE attractive for institutions—illiquidity and long-term investment horizons—now represent risks for retirees.

Individual investors should tread carefully.

Retail capital may prop up PE performance in the short term. But it won’t remove the industry headwinds.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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