For the past generation, there has been a strong trend which has worked for the benefit of investors, beyond the strengths or weakness of the underlying investments themselves. In general, getting into the stock or bond market has been safer, more open, more transparent, and cheaper. It hasn’t been universally true that investing is safe; the Ponzi scheme run by Bernie Madoff and the accounting chicanery at WorldCom and Enron demonstrates that liars and cheats are always going to be attracted to easy money, especially when they can operate in darkness.
That trend towards safety, transparency, and lower costs had a setback last week. Last Wednesday, private equity firms were given the greenlight to access 401(k) retirement accounts – something they’ve never been able to do before. Private equity firms were usually reserved for sophisticated investors, like ultra-high net worth qualified purchasers, national sovereign wealth funds, or public pension funds with dedicated investment review teams. Now, ordinary 401(k) plans have been given access to the high-octane, high-reward world of private equity. Advocates for this change – like lobbyists for the private equity firms -will point out that private equity programs can be very lucrative, sometimes one of the best performing asset classes. Opponents of this change note that private equity is expensive, illiquid, opaque, and bound to be misused and misunderstood by regular employees.
Private equity is an essential aspect of modern finance. As an investment, it is a valuable component to a sophisticated investor’s repertoire. We will be watching closely to see how the players in the space will tailor these products to the general public, or if they change their approach at all. More importantly, we’ll be watching out for investors who may have to learn quickly how to swim with sharks in the water.