Private equity firms are discovering a new type of client: ordinary
people.
Carlyle Group LP, Blackstone Group LP and KKR & Co., which usually
open their doors only to clients willing to commit at least $5 million, are lowering
that threshold or offering investments directly to individuals, an effort to
attract fresh cash amid lackluster fundraising. Their ultimate goal: a slice of
the $3.57 trillion Americans have accumulated in their defined contribution
retirement plans.
The firms are looking for ways to move down-market as a growing number of
workers are pushed out of public and corporate pension funds and into defined
contribution plans. While private equity funds are a staple of many large
defined benefit plans, a sale to individuals poses dangers because the
investments are hard to understand, can be illiquid and their fees are higher
than those of traditional mutual funds, said David John, deputy director of the
Retirement Security Project at the Brookings Institution, Washington.
“Should this start to take hold,” said Mr. John, “there needs to be
either a licensing, a seal of approval or some level of higher oversight so
people don't find that they are investing in something that really isn't
suitable for their stage of life.”
Private equity firms lock up investor money for about a decade with a
mandate to buy companies, improve their value and sell them with a profit. The
firms use debt to finance the deals and amplify returns, typically charge an
annual management fee equal to 1.5% to 2% of committed funds and keep 20% of
profits from investments. That compares with expense ratios of 1.27% on average
for U.S. mutual funds and 0.65% for exchange-traded funds, according to
Morningstar Inc.
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