Private Investments Are Coming to Your 401(k): Here’s Why to Steer Clear

Good news for Wall Street: alternative investments like crypto, private credit, and venture capital are on their way into Americans’ 401(k)s and IRAs. In fact, BlackRock CEO Larry Fink says the “50/30/20 portfolio” — 50% stocks, 30% bonds, and 20% private assets — may be just around the corner.

For private equity firms, the timing couldn’t be better. After losing some of their biggest backers — namely government funds, pensions, and universities — they’re now eyeing Main Street as their next funding source, one which could help shore up the industry. Fortunately for them, it won’t take much convincing.

Private by name, not by nature: For whatever reason, Americans romanticize private investments as a ‘haven’ of opportunity — the kind usually reserved for the rich. They’d do well to understand why wealthy individuals and even historically successful institutions are pulling away from these exact products. In short, private equity isn’t what it used to be.

• It used to be ubiquitous, justifying the excessive management fees — but now it’s become the ‘norm’, and according to Bloomberg Opinion’s Matt Levine, even “boring.”
• Both WSJ and Bloomberg report that investors are stuck “waiting longer for payouts,” making it harder for firms to raise follow-on funds.

It’s Not Just the Fees (Or Getting Your Money Back)

Of course, the relatively unsophisticated retail investor often assumes “private equity” means high returns, not knowing that the golden days of PE returns are likely in the rear view, nor that many firms are already having trouble raising money from their current investors. Never mind the fact that you could generally find superior, cheaper returns on public markets — but those aren’t the only reasons you may want to reconsider private investments:

• Right now, it’s still unclear how transparent these “private” investments will be — there might be hidden fees, a lack of metrics and data, and potentially even liquidity problems.
• There’s also the risk that some firms, especially those sitting on losing bets, could simply shift their failing assets to retail investors, exploiting their lack of literacy.

More cautionary tales: Wall Street and fintech firms might be banging the ‘private markets’ drum, but until the fees come down and the transparency goes up, most Americans would be wise to steer clear of the industry’s shiny new embrace of retail investors. Ask yourself — if these private equity firms didn’t need retail investors before, then why are they coming for your 401(k) now? Time will likely tell.