Should you trust private equity with your nest egg?

After years of acting like a dog trying to eat an old cigarette butt under someone’s patio chair, Wall Street firms have finally snagged a private market win. 401(k) manager Empower announced last week that it will start allowing individual investors to access private credit, equity, and real estate.

Private equity investments were ushered into retirement savings during the first Trump administration, but Biden’s Labor Department cautioned investors when including them in their portfolio. However, Empower’s plan that will let people invest 5% to 20% of their retirement portfolio in alternative investments is the largest adoption so far. Empower manages $1.8 trillion across retirement plans for 19 million people.

Private equity firms like Apollo Global Management and Partners Group have long touted the diversity private equity investments can offer everyday investors, especially as fewer private companies choose to go public these days. Only about 13% of US companies with annual revenues of $100+ million are publicly traded, according to Partners Group.

Bad reputation

You might remember private equity firms as folks who gutted Red Lobster? Or the groups hoovering up music catalogs? It’s even worth noting that private equity’s rapid growth over the last 20 years is a big reason that investment options across the public market have dwindled.

The hesitation retirement managers and investors have about betting their nest egg on private equity is warranted. There’s a lot less transparency when a company doesn’t have to report quarterly earnings, and determining valuation can be trickier. Most private investments also require longer commitments, meaning less liquidity. And while mutual funds or ETFs might charge a management fee, private equity usually collects a much higher performance fee (and a management fee).

Overall it’s a much riskier bet, which is why a lot of 401(k) managers and employers tend to avoid it.

Bottom line…Right now, private equity manages less than 1% of the estimated $12.5 trillion in assets held in 401(k)s, but not even a shock collar will hold back its quest for a bigger slice.—MM