September 29, 2020

401(k) Plans Move a Step Closer to Pooling With Private Equity

Private equity investments in new start-ups or in growth businesses can produce high returns. The private equity funds in the top 25 percent for performance earned at least 16.2 percent over the 10 years that ended in September 2018, according to PitchBook.

But that comes with myriad risks.

As the term “private equity” suggests, investments can be opaque. Companies in such portfolios don’t have to disclose as much information as publicly traded businesses. Investors also can’t cash out as easily as they can with public investments. Money is often locked up for eight to 10 years at a time.

And while private equity can score big by investing in the next Facebook, it can also lose money when a company doesn’t get off the ground. According to the same PitchBook data, the bottom 10 percent of funds had negative returns over 10 years.

In November, Andrea Seidt, the Ohio securities commissioner, told the federal Securities and Exchange Commission that a review of 100 enforcement actions over the prior two years — a partial snapshot — showed that more than 1,000 investors had lost in excess of $100 million in private offerings gone wrong.

The private marketplace has become increasingly important as start-ups stay private longer. Also, there are half as many public companies as there were two decades ago, leaving fewer places for everyday investors to store their money.

The Labor Department outlined the new guidance in coordination with the S.E.C. Jay Clayton, the commission’s chairman, said in the statement that the clarification “will provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies.”

The S.E.C. has supported giving smaller investors access to private equity through special investment vehicles that might work like mutual funds. Right now, only accredited investors — those with at least $1 million in assets not including their home, or $200,000 in annual income — can participate in private equity deals.

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