Private Equity Investing Now Allowed in 401(k) Retirement Funds
news.bloomberglaw.com
news.bloomberglaw.com
From the sounds of it, this ruling handwaves away the inherent risk of investing in a company whose finances you have no visibility into by claiming that putting it into a diversified private fund is the same as a diversified public fund. Which is fine, but they should be subject to the same reporting requirements as public companies.
These regulations didn't appear out of thin air. The business world is full of evil people looking to rob everyday investors. See: Enron.
Fund investors are usually family offices, endowments, foundations, fund of funds, secondaries funds, etc., and they all do a huge amount of due diligence on prospective fund investments. It's just as much work to research funds as it is to research public equities.
For reference, I have been an investment professional at both a PE firm and a hedge fund.
I'm not in PE per se, but would think investment in one is through an investment contract which is an exempt security
I don't think employees are excluded from this.
You don't want your retirement account to be a casino. You want companies that can provide stable, long-term growth of your portfolio-- so the money's there when you need it.
Pe includes many illiquid subcategories including real estate, LBOs, startup investing, even niche stuff like infrastructure investing
Not as the term is used in finance. Venture and PE are separate asset classes. Venture-like assets can become PE-like, in the same way private equity can become public equity. But PE is based on cash flows and leverage; VC is based on growth.
I have personal experience with at least two startups that had undergone that experience and are still around right now.
CFA is the best source, but there are so many others, including my professional experience at a major asset manager.
https://www.cfainstitute.org/en/membership/professional-deve...
> Definitions of private equity differ, but in this reading we include the entire asset class of equity investments that are not quoted on stock markets. The private equity class stretches from venture capital (VC)—working with early stage companies that in many cases have no revenues but have potentially good ideas or technology—all the way through to large buyouts (leveraged buyout, or LBO) in which the private equity firm buys the entire company. In some cases, these companies might themselves be quoted on the stock market, and the private equity fund performs a public-to-private transaction thereby removing the entire company from the stock market.
Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility.
There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.
It’s definitely a bit riskier but no one is going to lose their retirement savings because of this rule change. The fees on the funds that offer this exposure are where 401(k) accounts will really get screwed.
Public companies have to submit regular financial reports, which are handled by independent auditors. So you can be reasonably sure that a company claiming to make money, is making money. And executives have a legal requirement to protect share holder value.
Buying shares in Apple is much less of a "gamble" than opening your own business.
You should take a look at Fed actions regarding public markets over the past few months.
Certainly all the big PF in the UK will have some PE - source I had an off the record briefing from a trustee on one of the biggest UK ones.
For all the faults in the industry, fundamentally, private equity provides a means to invest in private companies that can benefit from loans or funding rounds, while also offering a return on investment to smart private equity investors. There have been plenty of scandals with private equity firms taking advantage of bankruptcy laws in large companies, but the industry as a whole seeds companies of every size, even though you only hear about VC firms in the tech startup bubble.
What
The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy.
So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."
Average people should be able to grow their wealth over time without throwing money into inefficient instruments.
By analogy, house flippers rely on a market for turnkey homes.
My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.
"At the time, Mr. Romney was not able to use a Roth IRA to make these investments because his income tax bracket exceeded the allowable threshold."
1. I set up an LLC.
2. I have a regular job which is earning me income.
3. I put some of that income into a 401K.
4. I direct the 401K to invest in my LLC.
5. As the guy running the LLC, I take that amount of money and pay myself a salary equivalent to what I put in.
How is that money ever going to grow? What's the benefit? You didn't pay taxes? Pretty weak benefit, IMO.
There is such a thing as self directed retirement. People buy real estate with it all the time. The regulations require, though, that any profits made out of it must go back into the retirement account until you're old enough to withdraw. I could use retirement money to buy a broken house, fix it up, and flip it. But all profits have to go back into that account. I cannot keep any for myself.
The benefit is for people that need to withdraw from their 401k before retirement without getting hit with the interest/fees. I guess another part of the benefit is if you want to take advantage of employer match but you don't want to invest in your 401k.
I didn't know about self directed retirement. I'll have to go do some research.
There's also self-dealing restrictions on IRAs and presumably self-directed 401(k)s as well.
Besides which, if you're fucking with the IRS, there's far better things to do than merely avoid a 10% early withdrawal penalty. Eg - have your Roth account own some company, then figure out a way to smuggle a gigantic pile of cash into said company. That money then never ends up getting taxed.
Most unicorns (and no, they aren't all scams -- many are pretty stable, or exited successfully, a la LinkedIn, Salesforce, etc) were private until they were worth tens of billions. Any gains post-IPO are small multiples of the original investment.
The only people able to invest, and actually capture that growth, were already wildly wealthy. Do you think that's fair?
I criticized buying Google in my other comment, but at 0.29% it's actually better than the Fidelity funds in this regard.
Investing $100 into Google to put 29 cents on SpaceX doesn't seem efficient. SpaceX could double in value, and the effect on the Google stock price would still be indistinguishable from noise.
I'm assuming this is available also for IRA and Roth IRA. What you do is setup two transactions: One that will lose money in the IRA, and the other that will gain in the Roth IRA. (A straddle.) Make sure you execute both at the same time (if it's a thinly traded security you can end up trading with yourself, but that's not necessary).
Then sell, and do it again.
You effectively move money from IRA to Roth IRA. (And yes it's legal, I contacted the IRS and asked.)
In the open market you can only move a small percent at a time, but with private equity the gains and losses are much greater and you can effectively move all your money.
Conversely, if you can't pick winners, then I think you can only set up a pair of trades which sometimes moves money in and sometimes out, with a net of zero.
I tried making charts of option prices in Excel and didn't come to any particular conclusion, except that maybe you always lose because of the dividend rules, spread, and commissions, and it seems like the maximum expected value is at-the-money.
It makes me think of violating thermodynamics with Maxwell's Demon.
If you trade with yourself, then it would be uninteresting plain fraud, and if you don't, I have the feeling the market will prevent you from getting anywhere.