16 June 2019

Private Equity Managers Eyeing DC Plans For Growth

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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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