WEBVTT - Private Equity Is Coming for Your 401(k) 0:00:02.720 --> 0:00:07.200 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.560 --> 0:00:11.320 One day in January, less than a week before President 0:00:11.320 --> 0:00:14.960 Trump's second inauguration, a group of more than thirty money 0:00:14.960 --> 0:00:19.480 managers hopped onto a Zoom call. It included representatives from Blackstone, 0:00:19.720 --> 0:00:22.240 Ubs and other big Wall Street firms. 0:00:22.680 --> 0:00:25.440 It was sort of a meeting of like minded individuals 0:00:25.440 --> 0:00:28.560 to strategize about. I guess goals would be a way 0:00:28.600 --> 0:00:30.160 of putting it that they have in common. 0:00:30.600 --> 0:00:34.040 Alison McNeely covers the private equity industry for Bloomberg. 0:00:34.440 --> 0:00:38.000 One key principle I think that folks were coalescing around 0:00:38.040 --> 0:00:42.120 was the idea to get more private equity, private credit 0:00:42.400 --> 0:00:46.320 hedge fund, that sort of thing into the retirement accounts 0:00:46.360 --> 0:00:47.720 of everyday Americans. 0:00:47.960 --> 0:00:51.080 They wanted a piece of the four to oh one K. 0:00:51.440 --> 0:00:52.920 It's kind of the next gold rush. 0:00:53.200 --> 0:00:56.080 For a long time, private equity firms have relied on 0:00:56.120 --> 0:00:59.840 capital from pension funds, endowments, and other kinds of professional 0:01:00.040 --> 0:01:04.240 investors to sustain their growth. But now these firms are 0:01:04.280 --> 0:01:10.760 looking to explore new frontiers, potentially very lucrative frontiers. There's 0:01:10.760 --> 0:01:14.600 about twelve trillion dollars in employer sponsored accounts like four 0:01:14.600 --> 0:01:15.880 oh one K plans. 0:01:15.880 --> 0:01:19.840 That's only expected to grow. Those funds don't generally have 0:01:19.920 --> 0:01:22.200 private assets in them, so if they can grab even 0:01:22.240 --> 0:01:25.040 a slice of that, that's a few trillion right there. 0:01:25.200 --> 0:01:28.000 And when they gathered on that pre inauguration zoom call, 0:01:28.200 --> 0:01:31.600 the industry's biggest players agreed, now is the time to 0:01:31.680 --> 0:01:34.319 start grabbing slices. What was the vibe like? 0:01:34.760 --> 0:01:39.520 The vibe was definitely optimistic. You know, there's a sense 0:01:39.520 --> 0:01:41.520 in the industry that now is the moment to strike 0:01:42.440 --> 0:01:44.600 four one ks and the goal of getting into four 0:01:44.640 --> 0:01:47.000 o one k's is an extension of a broader theme 0:01:47.040 --> 0:01:49.760 that really has been taking place for the private equity 0:01:49.840 --> 0:01:53.400 industry for many years now. The traditional sources of capital 0:01:53.480 --> 0:01:56.160 have been tapped out, but these private equity firms are 0:01:56.160 --> 0:01:58.920 still looking for ways to grow. And so what's a 0:01:58.960 --> 0:02:02.120 market that they haven't really tap it before regular people? 0:02:07.400 --> 0:02:09.880 This is the big take from Bloomberg News. I'm Sarah 0:02:09.960 --> 0:02:13.600 Holder today on the show. President Trump has signed an 0:02:13.600 --> 0:02:19.080 executive order allowing private equity into Americans retirement plans. What's 0:02:19.120 --> 0:02:21.440 behind PE's play for the four to oh one K? 0:02:22.040 --> 0:02:24.200 How likely is it to work and what would it 0:02:24.280 --> 0:02:33.200 mean for your savings? Let's say you're an employee working 0:02:33.240 --> 0:02:36.440 at a company that offers four oh one K retirement plans. 0:02:37.160 --> 0:02:40.120 You may not know exactly what kinds of investments are 0:02:40.200 --> 0:02:42.120 in the retirement plan you choose. 0:02:42.520 --> 0:02:44.400 I barely know it's in my pharaoh and K. To 0:02:44.440 --> 0:02:45.600 be quite honest with you. 0:02:46.000 --> 0:02:49.519 People tend to pick from a few default, pre mixed options, 0:02:49.840 --> 0:02:52.200 and that's what makes the job of selecting what goes 0:02:52.280 --> 0:02:55.120 into those four oh one K offerings so important. 0:02:55.440 --> 0:03:00.080 They basically have a responsibility to you, me to other 0:03:00.200 --> 0:03:05.360 employees under federal law, to essentially pick safe or responsible 0:03:05.360 --> 0:03:06.840 investments for us to choose. 0:03:07.160 --> 0:03:09.560 Traditionally, that's meant a four to oh one K is 0:03:09.600 --> 0:03:12.120 invested in a mix of stocks and bonds. 0:03:12.520 --> 0:03:16.400 The classic portfolio would be sixty percent stocks forty percent bonds. 0:03:16.800 --> 0:03:18.880 A lot of people are invested in what's called a 0:03:18.919 --> 0:03:22.280 target date fund, so basically you kind of pick the 0:03:22.320 --> 0:03:25.400 fund with the retirement date closest to when you think 0:03:25.480 --> 0:03:27.320 you're going to retire. I think I'm in like a 0:03:27.400 --> 0:03:29.840 twenty fifty five fund. I'm in my late thirties, So 0:03:29.960 --> 0:03:32.080 to give you an idea, right now, that fund is 0:03:32.080 --> 0:03:35.280 almost entirely in stocks, and as they get closer to retirement, 0:03:35.320 --> 0:03:38.200 that fund will shift into bonds because bonds are perceived 0:03:38.240 --> 0:03:38.880 to be safer. 0:03:39.360 --> 0:03:42.280 But stocks and bonds aren't the only kinds of investments 0:03:42.320 --> 0:03:44.360 a four to oh one K could include. 0:03:44.480 --> 0:03:47.200 There are folks who say, no, actually, like private equity 0:03:47.280 --> 0:03:50.800 is a totally valid and legitimate option as well, that 0:03:50.960 --> 0:03:53.840 just hasn't been offered so far. They would like to see, 0:03:53.920 --> 0:03:57.440 essentially my twenty fifty five target date fund take a 0:03:57.560 --> 0:04:01.280 slice out of stocks and bonds and instead put it 0:04:01.360 --> 0:04:03.000 into private equity funds. 0:04:04.560 --> 0:04:07.720 Can you explain how private equity firms work and why 0:04:07.760 --> 0:04:10.080 they aren't typically offered as an option. 0:04:10.320 --> 0:04:14.920 Yeah, so private equity, we're really using a simplistic term 0:04:15.000 --> 0:04:18.760 to sort of describe the broader industry. It's about twenty 0:04:18.800 --> 0:04:25.280 five trillion dollars in assets of private assets, so equity, debt, 0:04:25.720 --> 0:04:29.120 real estate. Basically, they don't trade on a stock exchange. 0:04:29.120 --> 0:04:32.160 They're sort of bought and held for the long term. Generally, 0:04:32.240 --> 0:04:35.400 when you invest in a private equity fund, you're handing 0:04:35.440 --> 0:04:38.359 over a chunk of change to that firm for ten years. 0:04:38.560 --> 0:04:40.000 You're saying, I'm going to give you a check for 0:04:40.040 --> 0:04:42.880 one hundred million dollars to invest in your latest fund, 0:04:42.920 --> 0:04:45.400 and you're going to go out and buy companies, turn 0:04:45.440 --> 0:04:48.520 them around, and then hopefully ideally sell them at a 0:04:48.520 --> 0:04:51.520 profit sometime in the next five to ten years. In 0:04:51.560 --> 0:04:53.880 the meantime, I don't expect to get my money back. 0:04:55.520 --> 0:04:59.080 Private equity firms typically make their money by buying a company, 0:04:59.320 --> 0:05:03.040 usually with debt. They try to maximize profits, cut costs, 0:05:03.080 --> 0:05:05.640 and eventually sell it for more than they bought it for. 0:05:06.360 --> 0:05:10.039 This setup means private equity investments are less liquid. It's 0:05:10.080 --> 0:05:12.480 harder for an investor to cash out if the firm 0:05:12.520 --> 0:05:15.800 hasn't yet turned around a business or flipped it. And 0:05:15.839 --> 0:05:19.640 now higher interest rates and declining asset values have meant 0:05:19.680 --> 0:05:23.640 fewer sales, which means investors aren't getting their money back, 0:05:24.040 --> 0:05:27.880 which chokes off that cycle of reinvestment. It's a big 0:05:27.960 --> 0:05:31.080 motivation for this push to tap new pools of cash 0:05:31.400 --> 0:05:36.280 like retirement savings. But for investors, being exposed to private 0:05:36.279 --> 0:05:38.080 equity comes with risks. 0:05:38.480 --> 0:05:40.480 There's a chance it might go bankrupt. There's a chance 0:05:40.600 --> 0:05:43.719 this turnaround planned or this sort of value creation plan 0:05:43.760 --> 0:05:46.600 you have might not work out. That is very different 0:05:46.680 --> 0:05:49.680 from investing in the stock of a big, publicly traded 0:05:49.720 --> 0:05:52.640 company where you're a shareholder and your one tiny, tiny, 0:05:52.680 --> 0:05:56.320 tiny little slice of all these other public shareholders where 0:05:56.360 --> 0:05:58.599 you can go and log into your brokerage app and 0:05:58.680 --> 0:06:01.600 buy and sell that's stock whenever you want. So they're 0:06:01.600 --> 0:06:05.800 just sort of perceived as a higher risk, higher return investment, 0:06:05.880 --> 0:06:08.120 and so in the past they've been restricted only to 0:06:08.200 --> 0:06:10.919 professional investors who kind of know what they're doing, you know, 0:06:11.000 --> 0:06:13.320 pension funds, endowments, that sort of thing. 0:06:13.440 --> 0:06:17.400 What about fees. Are PE fees higher than other investments? 0:06:17.680 --> 0:06:21.479 Yes, Private equity fees are typically what they call two 0:06:21.520 --> 0:06:24.880 and twenty, and so that basically means that the private 0:06:24.880 --> 0:06:28.640 equity firm takes two percent of whatever you give them 0:06:28.880 --> 0:06:31.080 as a management fee. That's just the money they make 0:06:31.120 --> 0:06:33.960 for managing your money. And then the twenty percent is 0:06:33.960 --> 0:06:37.440 that they take twenty percent of any profit that they make. 0:06:38.360 --> 0:06:42.080 The average ETF fee is closer to point four four percent, 0:06:42.680 --> 0:06:46.919 significantly lower than the average PE fee. These risks and 0:06:47.000 --> 0:06:51.080 fees have so far turned off four OHEK managers. Today, 0:06:51.279 --> 0:06:53.960 fewer than one in ten four oh one K plans 0:06:54.000 --> 0:06:57.520 offer any kind of alternative investment, According to a survey 0:06:57.560 --> 0:07:01.560 from the American Retirement Association, of those that do less 0:07:01.600 --> 0:07:05.000 than one in four include private equity in the mix. 0:07:05.960 --> 0:07:09.560 But private equity proponents argue these risks are worth it 0:07:09.600 --> 0:07:13.320 for the potential rewards. Walk me through some of the 0:07:13.400 --> 0:07:18.320 arguments that private equity managers use for including private equity 0:07:18.480 --> 0:07:19.880 in four h and K offerings. 0:07:20.200 --> 0:07:21.840 Yeah, so they say they beat the S and P 0:07:21.960 --> 0:07:24.440 five hundred, and they might have a point there. You know, 0:07:24.720 --> 0:07:27.600 if you want to broaden your exposure away from sort 0:07:27.640 --> 0:07:30.880 of the biggest tech stocks, away from the volatility of 0:07:30.920 --> 0:07:33.880 public markets, they might have an argument for that. 0:07:34.360 --> 0:07:37.880 But there's also a counter argument, Well. 0:07:37.720 --> 0:07:41.640 You're going into investments that are a lot more opaque, 0:07:42.160 --> 0:07:45.400 that are not valued on a daily basis. There's a 0:07:45.480 --> 0:07:50.560 little bit more art as to how they're valued and 0:07:50.640 --> 0:07:52.960 how they're traded and what they might be worth. Then 0:07:53.000 --> 0:07:55.520 who might want to buy them from you? Because you 0:07:55.520 --> 0:07:58.000 you know, with a private equity investment, the only way 0:07:58.040 --> 0:08:00.760 you make money if you buy a compon is you 0:08:00.800 --> 0:08:03.800 can find someone else to sell that company to. And 0:08:03.960 --> 0:08:06.119 that is actually a challenge that we've seen the private 0:08:06.120 --> 0:08:08.840 equity industry go through in the last couple of years. 0:08:09.120 --> 0:08:13.440 Higher interest rates, more expensive debt has made it harder 0:08:13.440 --> 0:08:15.360 for private equity firms to sell a lot of these 0:08:15.360 --> 0:08:18.760 companies that they've invested in, and so there is something 0:08:18.800 --> 0:08:20.760 to be said about also being able to get in 0:08:20.840 --> 0:08:24.880 and out of you know, MetaStock, knowing exactly what it's worth, 0:08:25.320 --> 0:08:26.840 knowing that someone will buy it from you. 0:08:27.680 --> 0:08:30.640 Still, people pushing to get private equity into four oh 0:08:30.720 --> 0:08:33.520 one case say that the fact that these are longer term, 0:08:33.760 --> 0:08:36.600 less liquid investments is actually a good thing. 0:08:37.000 --> 0:08:40.160 Pollo Global Management CEO Marcron is an example of this. 0:08:40.240 --> 0:08:43.199 They're a large private equity firm. They say that actually 0:08:43.240 --> 0:08:48.079 private assets because of the long term investment horizonment of retirement. 0:08:48.160 --> 0:08:52.240 It's a perfect match because you don't need your money 0:08:52.440 --> 0:08:57.440 for twenty thirty, forty years. You don't actually need to 0:08:57.480 --> 0:09:00.320 be all in stocks and bonds and things that can 0:09:00.360 --> 0:09:04.080 be sold on demand whenever you want on a daily basis. 0:09:04.160 --> 0:09:06.200 Right, you don't have to buy today, sell it tomorrow. 0:09:06.240 --> 0:09:08.520 You have to buy today, sell it in thirty years 0:09:08.600 --> 0:09:09.880 or forty years exactly. 0:09:09.920 --> 0:09:13.640 And by taking a smaller portion of your portfolio some 0:09:13.720 --> 0:09:16.559 people say ten percent, some people say twenty percent. By 0:09:16.600 --> 0:09:18.880 taking a portion of that and instead putting in a 0:09:18.880 --> 0:09:21.760 private equity fund, that yes, is a little bit riskier 0:09:22.200 --> 0:09:25.480 but has the potential for higher return. It's actually smart, 0:09:25.520 --> 0:09:27.520 and if you don't do that, you're leaving money on 0:09:27.559 --> 0:09:30.680 the table. A lot of people who are proponents of 0:09:30.720 --> 0:09:34.000 putting private investments, such as private equity into furrowon keys 0:09:34.160 --> 0:09:37.000 say the best way to do it would be as 0:09:37.080 --> 0:09:40.640 part of a diversified portfolio like a target day fund, 0:09:41.000 --> 0:09:43.720 and so it's basically like the asset mix would change 0:09:43.760 --> 0:09:46.880 over time. There are some people who still say, I 0:09:46.920 --> 0:09:50.120 don't know like that. It's still it's really difficult to 0:09:50.280 --> 0:09:53.920 determine how like the liquidity as they call it, will 0:09:53.960 --> 0:09:56.880 really work, if people will really be able to get 0:09:56.880 --> 0:09:59.120 out of these things if they need to, if the 0:09:59.200 --> 0:10:03.000 asset mix is really appropriate. Like these are still live 0:10:03.160 --> 0:10:05.720 questions that people are trying to solve. 0:10:06.080 --> 0:10:08.080 Part of the reason we don't know the answers to 0:10:08.120 --> 0:10:11.440 these questions yet is because private equity share of American 0:10:11.520 --> 0:10:15.560 four oh one k's is tiny. Trump's executive order will 0:10:15.640 --> 0:10:19.680 change that after the break the political shifts that could 0:10:19.760 --> 0:10:32.720 help PE capture investments from regular people. Four oh one 0:10:32.800 --> 0:10:36.079 k's were invented some fifty years ago to help workers 0:10:36.120 --> 0:10:40.280 avoid paying taxes on deferred compensation that evolved into a 0:10:40.320 --> 0:10:44.080 way for employees to save for retirement without employers having 0:10:44.160 --> 0:10:47.720 to offer a traditional pension. The number of people enrolled 0:10:47.760 --> 0:10:50.560 in four oh one k's and similar retirement plans has 0:10:50.600 --> 0:10:54.000 steadily grown, and companies are required to act in their 0:10:54.040 --> 0:10:57.600 employee's best interest when selecting the breakdown of their four 0:10:57.640 --> 0:10:58.760 oh one K offerings. 0:10:59.280 --> 0:11:03.640 Basically, the retirement law says the fiduciar has a sort 0:11:03.679 --> 0:11:08.360 of responsibility to pick the most prudent investment for their 0:11:08.440 --> 0:11:12.640 plan participants. They don't really say what prudent means, and 0:11:12.720 --> 0:11:16.280 so people have taken a really conservative interpretation of that. 0:11:16.760 --> 0:11:20.960 Bloomberg's Alison McNeely says that requirement is one reason many 0:11:21.000 --> 0:11:25.080 employers have shied away from including private equity in their plans. 0:11:25.400 --> 0:11:27.880 There's a lawsuit that a lot of people in and 0:11:27.920 --> 0:11:31.760 around the industry invoke, which is the Intel lawsuit. Intel 0:11:31.960 --> 0:11:35.760 was sued about a decade ago after Intel puts some 0:11:35.880 --> 0:11:39.400 private equity funds in some hedge funds into its Furrow 0:11:39.440 --> 0:11:42.520 and K plan. Some of those employees sued the company. 0:11:42.679 --> 0:11:46.000 They said, you put our plan into these private assets 0:11:46.040 --> 0:11:49.040 at the time that public markets were on a tear, 0:11:49.480 --> 0:11:51.640 and we actually missed out on the. 0:11:51.559 --> 0:11:55.560 Market rally, you didn't manage my money correctly by investing 0:11:55.559 --> 0:11:56.199 in private equity. 0:11:56.320 --> 0:12:00.959 Yeah, and so that lawsuit really created a chilling effect 0:12:01.280 --> 0:12:05.120 in the industry because other companies don't want to get sued, 0:12:05.600 --> 0:12:09.199 and they just basically want to know that if they 0:12:09.240 --> 0:12:12.840 were to allocate some of their foura on K into 0:12:12.840 --> 0:12:16.520 private investments, that they wouldn't get sued. And also, even 0:12:16.520 --> 0:12:19.560 if they do get sued and defend themselves, there's still 0:12:19.600 --> 0:12:22.560 a lot of headline or reputational risk there that many 0:12:22.600 --> 0:12:25.520 of these companies that are conservative by nature and want 0:12:25.559 --> 0:12:28.120 to protect their reputations would like to avoid. 0:12:29.520 --> 0:12:32.319 That. Intel case over its four oh one K strategy 0:12:32.480 --> 0:12:35.480 was eventually dismissed. The plaintiffs are trying to get that 0:12:35.559 --> 0:12:39.520 dismissal overturned on appeal, but some employers are waiting for 0:12:39.600 --> 0:12:43.000 a more definitive sign that exposing their employees for one 0:12:43.080 --> 0:12:45.880 ks to private equity won't get them into trouble. 0:12:46.480 --> 0:12:49.160 I think a lot of corporate four oh one K 0:12:50.160 --> 0:12:55.800 plan administrators are looking for a green light from the 0:12:55.880 --> 0:13:01.239 government that they won't be sued if they put alternative 0:13:01.240 --> 0:13:05.080 assets into their retirement plan. The way the law is 0:13:05.200 --> 0:13:08.959 right now is it's kind of silent technically from a 0:13:09.040 --> 0:13:14.240 legal standpoint, there's nothing preventing a company from putting private 0:13:14.280 --> 0:13:18.120 equity in their fore own K plan, provided they've done 0:13:18.200 --> 0:13:22.559 their due diligence and run their process to make an 0:13:22.559 --> 0:13:26.880 appropriate investment. It's really sort of a hearts and minds 0:13:27.280 --> 0:13:30.360 debate or argument or fight as much as anything else. 0:13:30.800 --> 0:13:33.360 With Trump in the White House and Republicans in control 0:13:33.400 --> 0:13:36.960 of Congress, private equity advocates have been waiting for the 0:13:37.000 --> 0:13:39.720 moment they get more clarity from the federal government. 0:13:40.000 --> 0:13:43.160 The first Trump Department of Labor did put out a 0:13:43.240 --> 0:13:46.160 letter that says we think that private equity has a 0:13:46.240 --> 0:13:48.120 role in for own cas. So that was a pretty 0:13:48.160 --> 0:13:51.600 clear signal back in twenty twenty that you know, folks 0:13:51.600 --> 0:13:53.080 could possibly go ahead with this. 0:13:53.760 --> 0:13:57.800 Is there evidence that employees would opt into those plans. 0:13:58.080 --> 0:14:00.600 I don't think there's a sense of this point that 0:14:01.200 --> 0:14:05.120 employees are clamoring for private assets, but maybe they will 0:14:05.120 --> 0:14:05.680 in the future. 0:14:06.800 --> 0:14:10.319 Right, For some people, private equity doesn't have the best reputation. 0:14:10.559 --> 0:14:13.840 They see headlines about its negative impact on sectors like 0:14:13.920 --> 0:14:17.200 healthcare and housing. I guess what I'm asking is, do 0:14:17.240 --> 0:14:19.440 you get the sense that some workers would want to 0:14:19.520 --> 0:14:22.400 avoid having their four oh one K tied up in 0:14:22.480 --> 0:14:25.120 private equity for ethical reasons. 0:14:25.520 --> 0:14:28.360 It's a really good question. There are people who don't 0:14:28.440 --> 0:14:31.080 like private equity, who don't like the impact private equity 0:14:31.160 --> 0:14:33.880 has had on healthcare and other industries, and they might 0:14:33.880 --> 0:14:38.520 object to having therefore one k invested in that. But 0:14:38.560 --> 0:14:40.600 if it's part of a target date fund, it's sort 0:14:40.600 --> 0:14:43.120 of being offered to them as part of a broad portfolio. 0:14:43.280 --> 0:14:45.280 They might not even be able to opt out of it. 0:14:45.400 --> 0:14:47.680 Like at this point, we don't really know. 0:14:56.520 --> 0:14:59.560 This is the Big Take from Bloomberg News. I'm Sarah Holder. 0:15:00.120 --> 0:15:02.640 To get more from The Big Take and unlimited access 0:15:02.680 --> 0:15:06.600 to all of Bloomberg dot com, subscribe today at Bloomberg 0:15:06.640 --> 0:15:10.520 dot com slash podcast offer. If you liked this episode, 0:15:10.640 --> 0:15:13.120 make sure to follow and review The Big Take wherever 0:15:13.160 --> 0:15:16.000 you listen to podcasts. It helps people find the show. 0:15:16.880 --> 0:15:18.880 Thanks for listening. We'll be back tomorrow.