Private equity professionals who may encourage the inclusion of defined
contribution pension plans in alternative assets aren’t ready to open up to
additional layers of scrutiny, experts say.
The US Department of Labor’s release of guidance greenlighting DC
investment in private equity has caused some market participants to wonder
if the market can retain the prized “privacy” that comes with not being
publicly traded or listed on an exchange.
“While there is a desire to have a new source of funds from consumers,
they’d rather do that without the transparency,” said Justin Miller,
managing partner at Bain & Company.
Pantheon and Partners Group, two of the large private market participants
who have actively sought guidance from the DoL on this matter in recent
years, have developed private equity strategies that can accommodate DC
plans. Both firms’ DC products in the US are offered as a collective
investment trust – an investment vehicle similar to a US mutual fund but
that is available only to qualified retirement plans such as 401(k) plans –
and structured as a custom target date, target risk or balanced fund. These
CITs invest in private equity and have a liquidity component to manage the
participant’s deposits and withdrawals from the fund.
Allowing DC plans to invest in private funds through target date, target
risk or balanced funds doesn’t translate to additional regulatory
disclosure requirements. Douglas Keller, head of private wealth and defined
contribution at Pantheon, believes that as the DC market evolves, it is
possible Pantheon may offer other, customisable strategies to the US DC
market, depending on what plan sponsors want exposure to.
That is where the disclosure picture may change.
For example, if the market were to evolve to allow DC plans to invest
directly in PE, then the disclosure requirements would be heightened
“If they were to suddenly let retail investors into private funds
generally, I’m sure the disclosure would be pretty much the same as a
public offering, which would be onerous,” said Marie DeFalco, fund
formation and structuring partner at law firm Lowenstein Sandler.
There are other ways for GPs to tap into retail money on a broad scale,
which would not immediately require additional disclosures, and much of it
would likely begin by offloading the complexity to banks or other related
“The most likely way for all but the very biggest firms will be to work
with an intermediary, and that intermediary will handle and absorb the
complexity of dealing with a retail investor or 401(k) plan,” said Miller.
“But you have to pay for that.”
Administrators ‘not excited’
Plan sponsors such as Vanguard, Schwab, Fidelity and others who manage
these plans could perform their own sub-accounting and internal division of
shares among participants, should they offer allocations to PE, said
A disconnect exists between managers and deal professionals who could
benefit from billions of dollars of new capital streams on the one hand,
and the service providers and financial intermediaries that would likely
have to manage much of the operational burden around reporting and
document-keeping on the other.
“We have a scenario here where everyone thinks it’s a great idea, people
want to do it and none of the people that actually have the technology to
record-keep these plans are interested in providing that service,” Miller
Outsourced record-keeping service providers such as Empower, Alight or
Ascensus do provide these services to a small number of clients but adding
potentially millions of 401(k) users and tracking illiquid investments may
require significant effort and additional investment.
“I’ve talked to one or two administrators that do record-keeping and
administration, and they are not excited about having to deal with an
illiquid investment at all,” said Miller. Some GPs aren’t excited about the
prospect of retail investment in the industry either.
Many of the CFOs and managers speaking with sister publication Private
Funds CFO in recent weeks have expressed concern about the risks the
development poses, and the inevitability of heightened reporting
requirements should the industry see broad allocations among plan sponsors.
“Maybe it won’t be today, but the moment you have a crash or a market dip
and people’s 401(k)s get plundered because they were all heavily allocated
to PE, and PE takes a hit, you can imagine what the social response would
be,” said one CFO.
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