(Bloomberg) Private-equity firms, the exclusive money managers overseeing $3 trillion worldwide for the wealthiest investors, 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 401(k) 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, which guarantee an income after retirement, and into 401(k)-style plans, where they are responsible for investing their savings. While private-equity funds are a staple of many large pension plans, a sale to individuals poses dangers because they’re 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 in Washington.
“Should this start to take hold,” said 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 percent to 2 percent of committed funds and keep 20 percent of profits from investments. That compares with expense ratios of 1.27 percent on average for U.S. mutual funds and 0.65 percent for exchange-traded funds, according to researcher Morningstar Inc.
The biggest firms, seeking to evolve into broader asset managers because buyouts are less profitable than before the financial crisis, have added funds to invest in real estate, credit, hedge funds and other asset classes. Expanding their client base to include retirement savers has proved to be harder.
“We definitely would like to be part of 401(k) platforms,” Michael Gaviser, a managing director responsible for individual investor products at KKR, which oversees $76 billion, said in an interview at the firm’s New York headquarters. “We think about it every day because there’s so much demand.”
Among the most-sophisticated investment products available, private-equity funds under U.S. rules can only be sold to accredited investors, defined as individuals with a net worth of more than $1 million or annual earnings of more than $200,000, or institutions with more than $5 million in assets. Some 401(k) plans may qualify, though employers must ensure the investments offered have fees, risk, transparency and liquidity that are appropriate for plan participants.
Defined-contribution plans such as 401(k)s let workers and employers contribute to a retirement account that’s run by the employee. The individual’s investing decisions directly affect his or her retirement income. Traditional pension plans, known as defined-benefit plans because they promise a lifetime payment, pool large amounts of money and usually have professional managers to invest it in a variety of assets.
Traditional pensions -- the California Public Employees’ Retirement System is the largest in the U.S. -- are among the biggest investors in private equity, though they have become more selective after losses during the 2007-2009 financial crisis. Private-equity funds raised $312 billion globally last year, less than half the $669 billion gathered in 2007, according to data from London-based research firm Preqin Ltd. Fundraising closed after an average of 17 months in 2012, compared with 12 months in 2007, according to Preqin.
With traditional investors reluctant to commit new money, firms are getting more serious about accessing individual retirement plans, which have been a reliable source of growth for traditional asset managers such as Boston-based Fidelity Investments.
Assets in 401(k)-type plans will grow about 6 percent a year to $5.03 trillion by 2016, surpassing the $4.9 trillion projected for public pensions and widening their edge over private pensions, according to Boston-based research firm Cerulli Associates.
KKR last year started two debt funds for individual investors. The Alternative High Yield Fund, which became available in November, is an open-end fund with a $2,500 minimum investment and the option to withdraw money daily. The Alternative Corporate Opportunities Fund is an unlisted closed- end fund with a minimum investment of $25,000 and quarterly liquidity. The funds, which will invest in assets such as high- yield bonds and bank loans, are the first pools managed by KKR that are structured like mutual funds.
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