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A top private equity executive has warned his investors that the push to place buyout fund investments into the accounts of US retirement savers could lead to poor returns, risking financial crisis-like taxpayer bailouts.
Robert Morris, founder of US private equity group Olympus Partners, told investors that “the 401k scheme bodes to be the successor to the 2008 mortgage crisis”, in a letter obtained by the Financial Times.
Olympus manages $12bn in assets and sent the letter to large endowments and sovereign wealth funds investing with it earlier this month.
Morris said “the multiple layers of fees” in private equity funds designed for retirees’ 401k savings accounts meant their “projected rate of return is unlikely to exceed that of an equity index fund” and noted that the funds exposed savers to “ample dollops of additional risk”.
He also questioned whether the expectations for such funds were too high and if ordinary investors were equipped to lose large amounts of money on individual deals.
The critique comes as some of the $4tn private equity industry’s biggest names, such as Apollo, Blackstone and KKR, anoint US retirees as a new source of asset growth as many institutional investors cut their exposure to the asset class amid declining performance.
The industry’s ambitions have been buoyed by US President Donald Trump, who this year signed an executive order meant to accelerate the push of such funds into 401k savings accounts.
“The marketing machines of the large asset managers have responded rapidly to the chum in the water,” said Morris, of recent efforts by the Trump administration to open $9tn in 401k funds to private equity deals.
Morris said investors who had been pitched a “cartoon version of private equity . . . paved with gold and high fees” might not be “financially and emotionally prepared to . . . handle a disastrous result”.
Top officials in the Trump administration, including Mark Uyeda, a commissioner of the Securities and Exchange Commission, have made opening up alternative investments to 401k plans a priority.
Last week, Uyeda made a forceful argument to have private equity deals included in 401k plans in a speech at a conference hosted by the asset management industry’s lobbying group in Washington.
“While there might be debate on what is the optimal level of exposure to private investments, what is clear is that the answer is not zero. Regulation should not presume that zero per cent exposure is inherently safer or preferable,” said Uyeda.
The SEC commissioner also echoed statements made by Apollo chief executive Marc Rowan that private markets offered diversification from increasingly concentrated public stock market indices, which had leveraged trillions of dollars in retirement savers to the “Magnificent Seven” of fast-growing technology stocks.
“While these firms have delivered strong performance, their dominance raises questions about whether passive investing can deliver the kind of diversification that is optimal for long-term retirement savers,” said Uyeda. “The key metric is not nominal return, but risk-adjusted return — the return achieved per unit of risk taken.”
Morris, however, said private equity deals carry far more risk than public market funds, especially given his expectation of their lower net returns.
“Why create yet another financial quagmire in a category where inordinate risk-taking is the strategy?”