Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: One day in January, less than a week before President
Speaker 2: Trump's second inauguration, a group of more than thirty money
Speaker 2: managers hopped onto a Zoom call. It included representatives from Blackstone,
Speaker 2: Ubs and other big Wall Street firms.
Speaker 1: It was sort of a meeting of like minded individuals
Speaker 1: to strategize about. I guess goals would be a way
Speaker 1: of putting it that they have in common.
Speaker 2: Alison McNeely covers the private equity industry for Bloomberg.
Speaker 1: One key principle I think that folks were coalescing around
Speaker 1: was the idea to get more private equity, private credit
Speaker 1: hedge fund, that sort of thing into the retirement accounts
Speaker 1: of everyday Americans.
Speaker 2: They wanted a piece of the four to oh one K.
Speaker 1: It's kind of the next gold rush.
Speaker 2: For a long time, private equity firms have relied on
Speaker 2: capital from pension funds, endowments, and other kinds of professional
Speaker 2: investors to sustain their growth. But now these firms are
Speaker 2: looking to explore new frontiers, potentially very lucrative frontiers. There's
Speaker 2: about twelve trillion dollars in employer sponsored accounts like four
Speaker 2: oh one K plans.
Speaker 1: That's only expected to grow. Those funds don't generally have
Speaker 1: private assets in them, so if they can grab even
Speaker 1: a slice of that, that's a few trillion right there.
Speaker 2: And when they gathered on that pre inauguration zoom call,
Speaker 2: the industry's biggest players agreed, now is the time to
Speaker 2: start grabbing slices. What was the vibe like?
Speaker 1: The vibe was definitely optimistic. You know, there's a sense
Speaker 1: in the industry that now is the moment to strike
Speaker 1: four one ks and the goal of getting into four
Speaker 1: o one k's is an extension of a broader theme
Speaker 1: that really has been taking place for the private equity
Speaker 1: industry for many years now. The traditional sources of capital
Speaker 1: have been tapped out, but these private equity firms are
Speaker 1: still looking for ways to grow. And so what's a
Speaker 1: market that they haven't really tap it before regular people?
Speaker 2: This is the big take from Bloomberg News. I'm Sarah
Speaker 2: Holder today on the show. President Trump has signed an
Speaker 2: executive order allowing private equity into Americans retirement plans. What's
Speaker 2: behind PE's play for the four to oh one K?
Speaker 2: How likely is it to work and what would it
Speaker 2: mean for your savings? Let's say you're an employee working
Speaker 2: at a company that offers four oh one K retirement plans.
Speaker 2: You may not know exactly what kinds of investments are
Speaker 2: in the retirement plan you choose.
Speaker 1: I barely know it's in my pharaoh and K. To
Speaker 1: be quite honest with you.
Speaker 2: People tend to pick from a few default, pre mixed options,
Speaker 2: and that's what makes the job of selecting what goes
Speaker 2: into those four oh one K offerings so important.
Speaker 1: They basically have a responsibility to you, me to other
Speaker 1: employees under federal law, to essentially pick safe or responsible
Speaker 1: investments for us to choose.
Speaker 2: Traditionally, that's meant a four to oh one K is
Speaker 2: invested in a mix of stocks and bonds.
Speaker 1: The classic portfolio would be sixty percent stocks forty percent bonds.
Speaker 1: A lot of people are invested in what's called a
Speaker 1: target date fund, so basically you kind of pick the
Speaker 1: fund with the retirement date closest to when you think
Speaker 1: you're going to retire. I think I'm in like a
Speaker 1: twenty fifty five fund. I'm in my late thirties, So
Speaker 1: to give you an idea, right now, that fund is
Speaker 1: almost entirely in stocks, and as they get closer to retirement,
Speaker 1: that fund will shift into bonds because bonds are perceived
Speaker 1: to be safer.
Speaker 2: But stocks and bonds aren't the only kinds of investments
Speaker 2: a four to oh one K could include.
Speaker 1: There are folks who say, no, actually, like private equity
Speaker 1: is a totally valid and legitimate option as well, that
Speaker 1: just hasn't been offered so far. They would like to see,
Speaker 1: essentially my twenty fifty five target date fund take a
Speaker 1: slice out of stocks and bonds and instead put it
Speaker 1: into private equity funds.
Speaker 2: Can you explain how private equity firms work and why
Speaker 2: they aren't typically offered as an option.
Speaker 1: Yeah, so private equity, we're really using a simplistic term
Speaker 1: to sort of describe the broader industry. It's about twenty
Speaker 1: five trillion dollars in assets of private assets, so equity, debt,
Speaker 1: real estate. Basically, they don't trade on a stock exchange.
Speaker 1: They're sort of bought and held for the long term. Generally,
Speaker 1: when you invest in a private equity fund, you're handing
Speaker 1: over a chunk of change to that firm for ten years.
Speaker 1: You're saying, I'm going to give you a check for
Speaker 1: one hundred million dollars to invest in your latest fund,
Speaker 1: and you're going to go out and buy companies, turn
Speaker 1: them around, and then hopefully ideally sell them at a
Speaker 1: profit sometime in the next five to ten years. In
Speaker 1: the meantime, I don't expect to get my money back.
Speaker 2: Private equity firms typically make their money by buying a company,
Speaker 2: usually with debt. They try to maximize profits, cut costs,
Speaker 2: and eventually sell it for more than they bought it for.
Speaker 2: This setup means private equity investments are less liquid. It's
Speaker 2: harder for an investor to cash out if the firm
Speaker 2: hasn't yet turned around a business or flipped it. And
Speaker 2: now higher interest rates and declining asset values have meant
Speaker 2: fewer sales, which means investors aren't getting their money back,
Speaker 2: which chokes off that cycle of reinvestment. It's a big
Speaker 2: motivation for this push to tap new pools of cash
Speaker 2: like retirement savings. But for investors, being exposed to private
Speaker 2: equity comes with risks.
Speaker 1: There's a chance it might go bankrupt. There's a chance
Speaker 1: this turnaround planned or this sort of value creation plan
Speaker 1: you have might not work out. That is very different
Speaker 1: from investing in the stock of a big, publicly traded
Speaker 1: company where you're a shareholder and your one tiny, tiny,
Speaker 1: tiny little slice of all these other public shareholders where
Speaker 1: you can go and log into your brokerage app and
Speaker 1: buy and sell that's stock whenever you want. So they're
Speaker 1: just sort of perceived as a higher risk, higher return investment,
Speaker 1: and so in the past they've been restricted only to
Speaker 1: professional investors who kind of know what they're doing, you know,
Speaker 1: pension funds, endowments, that sort of thing.
Speaker 2: What about fees. Are PE fees higher than other investments?
Speaker 1: Yes, Private equity fees are typically what they call two
Speaker 1: and twenty, and so that basically means that the private
Speaker 1: equity firm takes two percent of whatever you give them
Speaker 1: as a management fee. That's just the money they make
Speaker 1: for managing your money. And then the twenty percent is
Speaker 1: that they take twenty percent of any profit that they make.
Speaker 2: The average ETF fee is closer to point four four percent,
Speaker 2: significantly lower than the average PE fee. These risks and
Speaker 2: fees have so far turned off four OHEK managers. Today,
Speaker 2: fewer than one in ten four oh one K plans
Speaker 2: offer any kind of alternative investment, According to a survey
Speaker 2: from the American Retirement Association, of those that do less
Speaker 2: than one in four include private equity in the mix.
Speaker 2: But private equity proponents argue these risks are worth it
Speaker 2: for the potential rewards. Walk me through some of the
Speaker 2: arguments that private equity managers use for including private equity
Speaker 2: in four h and K offerings.
Speaker 1: Yeah, so they say they beat the S and P
Speaker 1: five hundred, and they might have a point there. You know,
Speaker 1: if you want to broaden your exposure away from sort
Speaker 1: of the biggest tech stocks, away from the volatility of
Speaker 1: public markets, they might have an argument for that.
Speaker 2: But there's also a counter argument, Well.
Speaker 1: You're going into investments that are a lot more opaque,
Speaker 1: that are not valued on a daily basis. There's a
Speaker 1: little bit more art as to how they're valued and
Speaker 1: how they're traded and what they might be worth. Then
Speaker 1: who might want to buy them from you? Because you
Speaker 1: you know, with a private equity investment, the only way
Speaker 1: you make money if you buy a compon is you
Speaker 1: can find someone else to sell that company to. And
Speaker 1: that is actually a challenge that we've seen the private
Speaker 1: equity industry go through in the last couple of years.
Speaker 1: Higher interest rates, more expensive debt has made it harder
Speaker 1: for private equity firms to sell a lot of these
Speaker 1: companies that they've invested in, and so there is something
Speaker 1: to be said about also being able to get in
Speaker 1: and out of you know, MetaStock, knowing exactly what it's worth,
Speaker 1: knowing that someone will buy it from you.
Speaker 2: Still, people pushing to get private equity into four oh
Speaker 2: one case say that the fact that these are longer term,
Speaker 2: less liquid investments is actually a good thing.
Speaker 1: Pollo Global Management CEO Marcron is an example of this.
Speaker 1: They're a large private equity firm. They say that actually
Speaker 1: private assets because of the long term investment horizonment of retirement.
Speaker 1: It's a perfect match because you don't need your money
Speaker 1: for twenty thirty, forty years. You don't actually need to
Speaker 1: be all in stocks and bonds and things that can
Speaker 1: be sold on demand whenever you want on a daily basis.
Speaker 2: Right, you don't have to buy today, sell it tomorrow.
Speaker 2: You have to buy today, sell it in thirty years
Speaker 2: or forty years exactly.
Speaker 1: And by taking a smaller portion of your portfolio some
Speaker 1: people say ten percent, some people say twenty percent. By
Speaker 1: taking a portion of that and instead putting in a
Speaker 1: private equity fund, that yes, is a little bit riskier
Speaker 1: but has the potential for higher return. It's actually smart,
Speaker 1: and if you don't do that, you're leaving money on
Speaker 1: the table. A lot of people who are proponents of
Speaker 1: putting private investments, such as private equity into furrowon keys
Speaker 1: say the best way to do it would be as
Speaker 1: part of a diversified portfolio like a target day fund,
Speaker 1: and so it's basically like the asset mix would change
Speaker 1: over time. There are some people who still say, I
Speaker 1: don't know like that. It's still it's really difficult to
Speaker 1: determine how like the liquidity as they call it, will
Speaker 1: really work, if people will really be able to get
Speaker 1: out of these things if they need to, if the
Speaker 1: asset mix is really appropriate. Like these are still live
Speaker 1: questions that people are trying to solve.
Speaker 2: Part of the reason we don't know the answers to
Speaker 2: these questions yet is because private equity share of American
Speaker 2: four oh one k's is tiny. Trump's executive order will
Speaker 2: change that after the break the political shifts that could
Speaker 2: help PE capture investments from regular people. Four oh one
Speaker 2: k's were invented some fifty years ago to help workers
Speaker 2: avoid paying taxes on deferred compensation that evolved into a
Speaker 2: way for employees to save for retirement without employers having
Speaker 2: to offer a traditional pension. The number of people enrolled
Speaker 2: in four oh one k's and similar retirement plans has
Speaker 2: steadily grown, and companies are required to act in their
Speaker 2: employee's best interest when selecting the breakdown of their four
Speaker 2: oh one K offerings.
Speaker 1: Basically, the retirement law says the fiduciar has a sort
Speaker 1: of responsibility to pick the most prudent investment for their
Speaker 1: plan participants. They don't really say what prudent means, and
Speaker 1: so people have taken a really conservative interpretation of that.
Speaker 2: Bloomberg's Alison McNeely says that requirement is one reason many
Speaker 2: employers have shied away from including private equity in their plans.
Speaker 1: There's a lawsuit that a lot of people in and
Speaker 1: around the industry invoke, which is the Intel lawsuit. Intel
Speaker 1: was sued about a decade ago after Intel puts some
Speaker 1: private equity funds in some hedge funds into its Furrow
Speaker 1: and K plan. Some of those employees sued the company.
Speaker 1: They said, you put our plan into these private assets
Speaker 1: at the time that public markets were on a tear,
Speaker 1: and we actually missed out on the.
Speaker 2: Market rally, you didn't manage my money correctly by investing
Speaker 2: in private equity.
Speaker 1: Yeah, and so that lawsuit really created a chilling effect
Speaker 1: in the industry because other companies don't want to get sued,
Speaker 1: and they just basically want to know that if they
Speaker 1: were to allocate some of their foura on K into
Speaker 1: private investments, that they wouldn't get sued. And also, even
Speaker 1: if they do get sued and defend themselves, there's still
Speaker 1: a lot of headline or reputational risk there that many
Speaker 1: of these companies that are conservative by nature and want
Speaker 1: to protect their reputations would like to avoid.
Speaker 2: That. Intel case over its four oh one K strategy
Speaker 2: was eventually dismissed. The plaintiffs are trying to get that
Speaker 2: dismissal overturned on appeal, but some employers are waiting for
Speaker 2: a more definitive sign that exposing their employees for one
Speaker 2: ks to private equity won't get them into trouble.
Speaker 1: I think a lot of corporate four oh one K
Speaker 1: plan administrators are looking for a green light from the
Speaker 1: government that they won't be sued if they put alternative
Speaker 1: assets into their retirement plan. The way the law is
Speaker 1: right now is it's kind of silent technically from a
Speaker 1: legal standpoint, there's nothing preventing a company from putting private
Speaker 1: equity in their fore own K plan, provided they've done
Speaker 1: their due diligence and run their process to make an
Speaker 1: appropriate investment. It's really sort of a hearts and minds
Speaker 1: debate or argument or fight as much as anything else.
Speaker 2: With Trump in the White House and Republicans in control
Speaker 2: of Congress, private equity advocates have been waiting for the
Speaker 2: moment they get more clarity from the federal government.
Speaker 1: The first Trump Department of Labor did put out a
Speaker 1: letter that says we think that private equity has a
Speaker 1: role in for own cas. So that was a pretty
Speaker 1: clear signal back in twenty twenty that you know, folks
Speaker 1: could possibly go ahead with this.
Speaker 2: Is there evidence that employees would opt into those plans.
Speaker 1: I don't think there's a sense of this point that
Speaker 1: employees are clamoring for private assets, but maybe they will
Speaker 1: in the future.
Speaker 2: Right, For some people, private equity doesn't have the best reputation.
Speaker 2: They see headlines about its negative impact on sectors like
Speaker 2: healthcare and housing. I guess what I'm asking is, do
Speaker 2: you get the sense that some workers would want to
Speaker 2: avoid having their four oh one K tied up in
Speaker 2: private equity for ethical reasons.
Speaker 1: It's a really good question. There are people who don't
Speaker 1: like private equity, who don't like the impact private equity
Speaker 1: has had on healthcare and other industries, and they might
Speaker 1: object to having therefore one k invested in that. But
Speaker 1: if it's part of a target date fund, it's sort
Speaker 1: of being offered to them as part of a broad portfolio.
Speaker 1: They might not even be able to opt out of it.
Speaker 1: Like at this point, we don't really know.
Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 2: To get more from The Big Take and unlimited access
Speaker 2: to all of Bloomberg dot com, subscribe today at Bloomberg
Speaker 2: dot com slash podcast offer. If you liked this episode,
Speaker 2: make sure to follow and review The Big Take wherever
Speaker 2: you listen to podcasts. It helps people find the show.
Speaker 2: Thanks for listening. We'll be back tomorrow.