research memo<\/a> that the upcoming products aimed at the retail channel may have a hard time living up to the industry\u2019s hoopla about adding alternatives to portfolios. This is a condensed and edited transcript of our conversation.<\/p>\nTrump\u2019s executive order aims in part to reduce litigation risk for employers and plan administrators. What\u2019s happening next to allow the public to see private market products in their 401(k) plans?<\/p>\n
Wiek: A variety of US government agencies need to come up with some guidance six months following Trump\u2019s executive order, which would put it in early February. One of the major reasons 401(k) offerings haven\u2019t included private markets is the risk of litigation. I\u2019ve sat on employer retirement committees, and those are often made up of HR benefits people. Anything that sounds risky or more expensive is likely to seem like too much of a risk for them because there have been a large number of lawsuits against employers. So they\u2019ve been running a little bit scared and not wanting to dip their toe into the waters of private markets.<\/p>\n
How is the asset management industry touting the arrival of private market products?<\/p>\n
You\u2019re hearing a lot about how great this is from a diversification standpoint, that investors can get access to assets that should hopefully improve their risk-return profile over time. Most of the publicly facing information that\u2019s come out has been on the educational side. They\u2019re trying to normalize the idea so that decision-makers responsible for what funds are offered in 401(k)s will focus more on the potential bene<\/p>\n
In your note, you engaged in a bit of mythbusting about the investments that would be used in 401(k) plans. What are you seeing?<\/p>\n
The private-market-inclusive target date and managed account solutions that have been announced for 401(k) investors are by no means homogenous, but these funds have some percentage\u2014well less than half\u2014allocated to private markets, an amount that declines in funds where retirement is more imminent. The term \u201cprivate markets,\u201d which was used in Trump\u2019s executive order and in a lot of other announcements about this trend, can refer to a variety of assets, however.<\/p>\n
For those imagining high-octane investments like early stage VC, they may be disappointed, as the private sleeves are more typically made up of some combination of private credit, real estate, infrastructure and possibly private equity. While this is still a nice bit of diversification currently lacking in target-date funds, the equity component will be a small portion of an already small sleeve.<\/p>\n
The reason for this is the liquidity profile of a 401(k), where employees contribute small amounts every couple of weeks. It\u2019s easier to put that money to work into public markets and credit investments than it is into the world of private equity or venture capital.<\/p>\n
You singled out income-producing assets, like private credit and real estate, being better-suited to small investors than, say, a direct investment in private equity.<\/p>\n
In order to provide liquidity, you can get it by receiving interest or rental income or selling things. And oftentimes, selling things is not a great option in the private markets, particularly when a mass of redemption requests comes through. The value-add proposition for venture and private equity comes from buying at a low price, spending some time making this a better company, and then selling it for a better price. You don\u2019t want the vagaries of people\u2019s redemptions to be telling you when you must sell these assets.<\/p>\n
On the other hand, you\u2019ve got income-producing assets like credit, real estate, infrastructure, which are paying interest or rents. Those might be building up some cash that you could use for redemptions. That would allow liquidity to occur in a way that would fund any potential redemptions without having to alter your investment strategy or sell things when it\u2019s not a great time to be selling.<\/p>\n
If retail investors are looking at this change as an opportunity to play in bolder assets like the PE or VC market for the first time, are they going to be let down?<\/p>\n
If you read the executive order, it does highlight things like crypto, venture capital and private equity. But if you look at what products are available for retail, the vast majority is sitting in private credit, real estate and infrastructure. A lot of the stories being told are \u201cHey, you could have gotten into SpaceX years ago and ridden that right up.\u201d I just don\u2019t think that that\u2019s going to be the primary exposure to private markets that some people might be thinking.<\/p>\n
Even if one does get access to VC-backed companies, you\u2019re talking about pre-IPO companies like SpaceX or OpenAI\u2014assets that are very mature and have a much different growth potential because they\u2019re more like standard large-cap companies.<\/p>\n
Look at crossover funds from the likes of well-known mutual fund companies like T. Rowe Price and Fidelity. They\u2019ve been including pre-IPO companies in their portfolios for years, but it has been with the hope that they will go public in the near future. They aren\u2019t hoping to invest and stay in for the long period that early-stage venture capital might do. But really the best returns in venture come from identifying a great opportunity early on and having the patience to wait until it\u2019s a much bigger company, and attractive to big investors, to corporates, to IPOs that will give a great payout.<\/p>\n
That VC model is very unlikely to be included in these 401(k) offerings. If they do get exposure to equities, as it were, it probably will be more likely to get into very mature companies where you\u2019re actually cashing out the venture capitalists who have made a ton of money. Any upside remaining in these companies is likely to be less than what the initial investors enjoyed.<\/p>\n
What kind of structures would the industry most likely offer?<\/p>\n
I think there\u2019s going to be a lot of people testing models. We\u2019re seeing things like KKR and Capital Group, one very storied private equity firm and one very storied public equity firm, coming together and creating solutions for private wealth investors. My guess is that it would still be a fund of funds, that KKR manages a sleeve of this portfolio and Capital Group manages a sleeve. And actually, that\u2019s a really interesting combo, because Capital Group is known for sleeving their portfolios, but in-house. They would have multiple fund managers working on one fund, and each gets a portion of that fund allocation and manages it individually.<\/p>\n
It just makes sense to have diversified portfolios. If you had three individual private companies and you sold one, you\u2019d suddenly have a whole lot of cash. Unless you\u2019ve got a great idea to immediately put it into, it\u2019s going to be a difficult portfolio management proposition.<\/p>\n
How do the unique cash flows of a 401(k) affect the fund manager\u2019s ability to put that capital to work in private markets?<\/p>\n
Employees can contribute up to $23,000 a year to a 401(k), broken up into 26 biweekly paychecks. Those are fairly small numbers that an asset manager then has to aggregate maybe twice a month. And what are they going to do with that money? Are they going to find a company every two weeks that they\u2019re going to buy with these assets coming in? Will they wait until they have a significant amount of money and then go buy a company? Or will they invest the way private equity typically operates and wait until they find a really great company at a good price and then put the money to work? If it\u2019s the latter, where\u2019s that money going to sit while they\u2019re waiting for this great idea to materialize? It\u2019s difficult to figure out how you provide exposure to private markets when money is continually flowing in and out from a large number of individuals.<\/p>\n
Read Hilary Wiek\u2019s full report here<\/a>.<\/p>\n\n\t\t\t\t\t\tEditor\u2019s Note: This piece was originally published on Pitchbook.com.\n\t\t\t\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"If you\u2019re a US worker with a 401(k) retirement plan, you may soon gain the option to add…\n","protected":false},"author":2,"featured_media":103784,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[114,268,85,46,266,267],"class_list":["post-103783","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-finance","tag-il","tag-israel","tag-personal-finance","tag-personalfinance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/103783","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=103783"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/103783\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/103784"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=103783"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=103783"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=103783"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}