Introduction to Private Equity Investments
Executive order signed by President Donald Trump last month should make it easier for pension plans in the workplace like 401 (K) to offer investments in alternative assets such as private equity and private credits.
Democratizing Access to Investments
Followers of the idea believe that they "democratize" access to investments, which are largely only available for institutions and very wealthy people. They say that retail investors would offer better commitment to the entire economy, as so many companies decide to stay private.
Opportunity for Better Returns
It is also advertised as an opportunity for normal investors to possibly achieve a better long-term return of their money. But is that true? The question of how private markets have developed in relation to public markets is the subject of the debate.
Comparison with Public Markets
The answer you receive depends on which studies you refer to and which metrics you want to compare. While some studies say that private markets have been exceeded, others say that this is not the case. This discrepancy is partially driven by using the public benchmarks researchers for comparison, what type of private funds they analyze, how to calculate the returns of private funds and which time frames they choose for measuring performance.
Measuring Performance
There is no index for private assets for the beginning, which is comparable to public market indices such as the S&P 500 or Russell 2000. And there is no uniform way that researchers measure the performance of private funds. You can calculate what is called "public market equivalent" (PME). Another metric used is that "Internal return" (Irr).
Studies on Private Equity Performance
When asked whether private markets have exceeded the public outperformations, they can often receive a yes from those who prefer access to retail investors to alternative investments. However, other researchers and pension experts can say that private markets have not exceeded the public. For example, a current study by Ludovic Phalippou – Professor of Financial Economics at Oxford University, said the business school and author of the book "Private Equity Laid Laid Laid" – came to the conclusion that private equity funds have been returned "about the same" public stock indices since at least 2006.
Challenges for 401(K) Plans
Apart from the comparisons with public benchmark, 401 (K) plan sponsors should check whether the private options that are accepted, probably as well as traditional private funds. In order to better meet the needs of 401 (K) participants, the new products must be structured differently than a traditional private investment fund.
Structuring New Products
Traditional funds usually have very high fees, very little transparency and only require investors to enter their money when the managers have completed a deal in which they can invest. And traditional funds often demand that investors keep their money in the fund until it has unloaded assets after a few years. In contrast, an investment product with private asset engagement for pension plans in the workplace can have slightly lower costs and the investors regularly insert money and regularly withdraw during the year.
Costs and Fees
Even if a new product investor is less than what it would have to pay in a traditional private fund, they still pay more than what is calculated in index funds, some of which can only cost $3 to 10 per year. "The new products for 401 (K) plans and asset platforms lead to another layer of costs (sales fees, liquidity management fees, platform fees) in addition to the already high fee structure of conventional PE funds,"
Conclusion
Conclusion: “It is certainly possible that some of these new products will outperform a traditional equity fund in the public market. On the other hand, he also expects a number of new products “hybrid portfolios that mix both public and private assets. "We see a great development in this room, especially with collective investment lines, which is a good thing, since Cits often require daily liquidity, and too much private exposure in a daily liquid vehicle would be a recipe for a disaster,"
