Private Equity Is Coming for America's $12T in Retirement Savings
bloomberg.com
bloomberg.com
Just what retirees need. PE and VC vultures don't have access to dumb institutional money anymore, so they're lining up to suck the blood out of tens of millions of little people.
They know that there are many who are either ignorant or desperate enough to go all in on crypto, AI, NFTs, inflated "unicorns" or whatever other hot scam that rises up in the future.
Bagholders will be retirees who have no recourse when 99% of these schemes fail, while the hyenas laugh all the way to the bank.
This is going to happen guaranteed now.
Crypto scammers take millions, private equity takes hundreds of billions. It hollows out entire industries; kills hundreds and hundreds of thousands of jobs. In PE funded nursing homes the mortality rate is 10% higher. PE owned hospitals raise prices by 20-30% while cutting staff.
PE firms pay lower tax rates (carried interest loophole), ie, they steal from everyone. A 2022 ProPublica investigation estimated that tax loopholes exploited by PE cost the U.S. government $180 billion annually in lost tax revenue.
'Dividend recapitalizations' have extracted hundreds of billions from businesses, often leading to their failure.
The estimated economic damage from PE is well over a trillion dollars; and I'd say that's extremely lowballed.
Crypto might be riddled with scammers from top to bottom, but there is real potential there; and even if there wasn't, it still wouldn't have a patch on private equity as far as "sketchiness".
How can they not... The whole goal of PE is to extract value from workers and the Earth, and funnel it into the pockets of the .01%. This, in a world where inequality is stifling our potential as a species, and as a planet, on a truly unimaginable scale?
Beyond the hype and the rationalizations, fundamentally, the investors always win and society always loses. They've turned our industries into a casino, and they're the house. Sometimes good people win in a casino, and sometimes they even get paid out, but it's a fucking mugs game that preys on our blind spots and is leading us into some very dark places.
This will solve the problem with boomers holding all the wealth. yay!
You should always be doing it.
And this is why I'm glad enough Germany has a public pension scheme that actually works and not some 401k crap. The last attempt to introduce something stock based here ("Riesterrente") ended up being an utter scam that made people distrust in the stock market ever since - and that's how things should be.
Stock markets should be for investors looking to raise investment capital to further the growth of their companies from other professionals, derivatives/futures markets should be heavily restricted (e.g. agricultural futures for a long time used to be reserved in trade for farmers and wholesale-scale buyers - nowadays the majority of trade is being made by speculative free-loaders), and pensions should be backed by the government because chances are higher there is still a government in 40 years than whatever hot tech startup is the utter hots these days.
Which is the flaw in most public systems. There is no way the pension system of the Netherlands will work for people currently younger than about 50. It seems pretty unlikely it will even work until death for people currently entering the system.
The actual problem is deeper. You don't care about money in old age. You care about living expenses, housing, and medical care. Most of that is effectively labor. Labor you get to use after you can't work anymore yourself. The money is a means to an end. And that's where just about every pension system fails, public or private. And that labor will definitely not be available in 20 years at the level it is today. Pensions being public or private simply change the method of failure: currency devaluation, raising costs or bankruptcy of the pension system, take your pick. It does not change whether they fail.
Indeed but a government at least has some sort of accountability and long term thinking built in. The forces of the market are by nature short-term dominated and are accountable to effectively no one (but a few select billionaires).
Neither of which seem a particularly strong incentive to think long term.
Social Security is a pretty amazing system. Inflation and a fixed cap for taxation has led to a relatively minor revenue shortfall, 90s welfare reform pushing welfare recipients to SS Disabilty, and a few other factors driving the spend side higher. We also tax those benefits for many, and fund Medicare through premium payments.
You need to raise taxes and push out the the cash flow issue a decade. Then demographic trends fix it. Instead, we’re exploring this cruel & destructive approach, which will trigger a depression in the end. Between housing defaults, implosion of medical facilities as Medicare funding gets slashed, and god knows what else, we’re damaging the country.
Demographics is the core thing that dooms all current forms of pensions, no matter if government, stonks or people just hoarding cash or other assets - in the end it's all fundamentally "IOUs" assuming that in 30, 40 years someone will be willing to trade that IOU from decades past into care. The one sole exception is real estate because a roof over the head doesn't need to be traded to be worth something for survival.
Up until now, this expectation has largely worked out over the millennia. People had ample children (by necessity), so there was always a healthy supply of working power to back the value of IOUs with work or consumables, old people plainly didn't live long (up until the 1800s, average life expectancy was barely 40!), and the young generation used to get at least some scraps of inheritance.
But at the moment, this is all broken across Western societies. People barely have children due to a number of factors (the pill, demands of employers, working too long hours, housing shortages, exploding costs of living, the economic and social poly-crises ever since 2001 9/11 ...) which will throw wrenches into the core promise of someone being there to trade the IOUs, old people live way too long (we're at about 80-ish years now) for any system to be sustainable because you can only get about 45 to 50 years worth of full-time working out of a human but they'll be living double that on the dime of society, and by the time my generation can hope to get some assistance in starting our families in form of inheritance we'll be long past the time where we could actually have used it.
Long term we're fucked, and I'd hope our governments show to be more deserving of our trust than tech and finance bros.
This is mostly tangential to your point, but life expectancy for those that survived the first five years of life has never been 40. The averages for older populations are massively dragged down by the deaths of babies and small children either in childbirth or due to infectious diseases.
The US doesn’t have a fertility problem, we have interest in immigration and do a great job at keeping people poor and ignorant.
Lack of inheritance as far as that goes is mostly because for regular people, the estate tax is a casino. If you’re lucky to die quickly, your kids let stuff. If not, you’ll end up expending your assets on long term care as we don’t have a rational healthcare system, and rich people can use trusts to avoid that landmine.
Also 401ks don't invest in single stocks, but mostly index funds...
I was talking about something similar with a family friend (in the high finance space) a few years back.
When will passive investments and indexes be manipulated and carved out for “wealth extraction”?
With the funds locked away for years by law/policy preventing a move to safer territory, without any FDIC guarantees to keep retirees solvent; the plans were a tempting pool of money.
With social security being pushed for insolvency; I think my generation is well-and-truly in trouble.
If you’re a boglehead with your money in VTI, you have 1.5% of your money in a meme stock. Big scammy companies like Tesla drag the whole market down when they pop.
So much financial protection comes from public companies trading. But that's also means it's somewhat harder to gamble on the system and manipulate the market.
With companies going private and private equity being more commercialized, we are going to see some nasty stuff. Finance has always had nasty parts, however, no good comes from less transparency.
We need new financial regulations around private equity ASAP. Up to and including making the trade of private equity illegal. Having a private black market for equity is bad for everyone other than insiders.
How would this even work? "Private equity" just means shares in non-public companies. How would private companies raise capital, which are often are done in the form of trading equity for cash? Should a startup be forced to go public just to raise their series A? Even outside silicon valley or wall st, even something as benign as a neighborhood coffee shop is technically "private equity". Should such business owners be barred from selling their businesses to anyone?
>Having a private black market for equity is bad for everyone other than insiders.
I understand the justification for banning private equity for individual investors on the basis that they can't be expected to discern scams from non-scams (hence the concept of "accredited investors"), but it's far less clear why institutions can't be trusted to do their own due diligence before engaging in a trade.
A good question that I don't have a good answer for.
I don't have anything really against individual investors taking a risk on a private business. However, I have big issues with there being a large market for these risks to be traded, swapped, and financialized.
That's where I see most of the danger, it isn't the first hand selling of equity but rather having a literal market for such equity. I shouldn't be able to short kim's coffee shop.
> it's far less clear why institutions can't be trusted to do their own due diligence before engaging in a trade.
Because they, frankly, aren't trustworthy. How much money by VC firms has been dumped into obvious ponzi schemes such as FTX?
The issue I have with institutions is they aren't concerned with due diligence, they are concerned with turning a profit. That means they are more than happy to turn a blind eye to obvious company problems if they think they can get in and out before a meltdown (IE, pump and dump).
At least with publicly traded stocks you can have substantial market depth so valuations can be "real". But move to private equity and well even that little goes away...
I think we could start by eliminating the carried interest loophole. This would eliminate an artificial incentive to engage in PE “work” that really shouldn’t exist in the first place.
Of course, in the current environment with fraudsters being pardoned, that’s a fantasy.
Maybe? Going public just means that you have to report certain information about your financials to the SEC. I get why companies don't want to do that, but if VC investments are going to start being traded as part of 401k plans I'm not sure why the public shouldn't get to see that information. It seems feasible and reasonable to maintain an exception for what you might call "true" private equity, where specific people buy and sell specific companies rather than trading them in liquid markets.
I absolutely do not want to be involved in a VC scheme because I would lose my shirt.
However, the stock market shrunk over the years as a second tier for the investor class, because VCs are where the real risk taking and wealth generation happens.
The sales pitch with passive investing is that it is an anti-decision...there are no anti-decisions. The only way to produce a savings system that works is to recognise that people are shmucks, people who index funds are also shmucks, and that you need a professional to manage those funds cost-effectively.
Almost no individual investor should ever be making a decision about VC investing (why do you think so many VC firms have listed publicly now? You have to fish where the fish are). But this is the job of plan sponsors, there is no why reason why DB funds should be doing all this stuff (and it going pretty well...people think they are smart investing in passive funds, they aren't aware that DB funds are doing segregated account deals with active managers for LOWER fees than passive funds, most passive funds are high-fee in institutional terms) but no-one else can do it? Makes no sense (as long as individual investors are not making these decisions).
401k plans aren't primarily to blame, but the (real) investment class will try and pin the blame to the rank-and-file investors and retirees.
All this because there's pressure to find source of short-term-growth, hell or high-water.
The problem of housing is real, and this should be solvable because it’s first and foremost a policy problem which causes a supply problem.
For example I live in an area that encourages the rebuilding of single family homes into townhouses.
It’s a nice compromise and more cities should be adopting this; yet it’s certain states like California that represent a bi-partisan problem with outdated policies grandfathered in.
Certain segments of the population won’t vote against their self-interest; but these individuals will be the least impacted by destroying 401k, ironically enough.
It's not though, at least at the scale that it matters, it's an economic problem brought on by a decrease in individual's relative capex. If in 1970 a person (let's say carpenter because I like biblical analogues) could purchase a truck for $2,600, even if their entire yearly salary was $10K, they had a 2/3 left over after a major life changing purchase. If in 2025, someone makes $50K, they may be in a higher income bracket in their relative area, but the truck costs 50k and must be financed over ~"time(indebt)", that's happening across all sectors and is the issue
If you're willing take a journey with me: Near the end of Bill Clinton's second term, a bi-partisan bill was passed in 1999: https://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bl...
For Republicans, this represented a long-term desire by the WSJ crowd, to free-up money and assets locked in commercial banks; and make it available into the Investment Banking side.
For Democrats and the DEI crowd of then, relaxing the lending rules was considered a win for minorities who had a hard time buying property--mostly because of strict but impartial lending requirements, which was still pegged as "racist".
Around that time, China joined the WTO and by the early to mid 2000s the US was flush lenders wanting to get in on the mortgage-backed security action. This is when home prices doubled or tripled in value, in the span of 6 to 8 years, and was a nation-wide phenomena. It's only risk adverseness and a quip from a mortgage lender, when my family was denied many years earlier because we were quite poor, that saved me from a major financial mistake.
After the bust--which hit minorities the hardest, by the way--there should have been a price correction and this peaked in 2009: For a brief time in the early 2010s there was, with a supply of distressed properties, but strangely enough prices never corrected nationwide to the levels they should have and this is because of the long influx of cash from tech, which delayed things for another 10-12 years and kept the prices growing in areas that had jobs.
Your generation was responsible for the last 4-6 years of prices not getting corrected; when I pushed for unions and trade guilds at the cost of spiky income--proudly been doing so since the late 1990s, thank you--you can absolutely bet that I was shouted down recently as back in the 1990s and 2000s, whenever the topic steered near that direction.
Today, what we're left with are: Homes continuing to be built for those flush with money or nearing the highs of their career; and overpriced homes purchased during the early 2000s that at best are losing value through inflation.
> Your generation was responsible for the last 4-6 years of prices not getting corrected
Pushing back here, what kind of idiot thinks integrated economics over dissociative political topology works, this problem was festering when I was in diapers courtesy ya'll
i can't get you Gates level rich but you can do well strating young when it looks impossible.
Social security? Not a nest egg, always under attack, and always under pressure to move the age higher. Pensions? Long out of fashion. Real estate? Out of reach, except in distressed areas. 401ks? Was only ever for the upper-half of the middle class, and even this is under attack.
1. Baseline Status quo - no changes.
2. Move all $12T into reducing the $36T of US debt. 1 time payment. All 401k’s are reduced to $0.
3. Allow for PE to productize into this $12T, siphoning off various amounts over time.
4. 401k holders can choose their own non-traditional investments.
I’m not advocating for any specific outcome because I know nothing on this topic but as a starting point, show me what happens with each, normalized and compared.
I can tell you this scenario results in french revolutions
Whose leading the revolution against 401k theft? Is Vanguard going to invite people with 401ks to a rally in DC?
also: see the preemptive strike on revolutions https://gking.harvard.edu/files/gking/files/censored.pdf?mod...
Economically, little changed for the regular people. The church was ruined, and so were many high class families. Socially, a lot did (there was an expectation of humans having rights, the church was forever relegated to a secondary role and out of governance, etc).
Most social revolutions (changing the social order, so the US war of independence doesn't count) have a grassroots component that is often highjacked by educated professionals (lawyers are a bit overrepresented) for their own social and economic agenda (which, to be clear, is a net positive compared to the previous order)
“Spending money studying quality of life is a waste of good money that could be making us wealthier.” - Private Equity
“Wealth distribution doesn’t need to be studied. Distribute your wealth to us, obviously.” - Private Equity
Claiming that those deserve studies is to suggest contradiction of those two beliefs, which I’m representing here as quotes based on my best-faith summary of their industry’s actions to date. People tend to react with hostility when someone suggests that their beliefs might be mistaken, especially when peacefully allowing debate to occur might reduce their future earnings.
> I’m not advocating for any specific outcome
Your question itself advocates for a reevaluation of the validity of those two beliefs, an outcome that you value as higher importance than complying with Private Equity’s values, so this declaration of “not advocating” is false. And since simply posing your question alone is enough to antagonize Private Equity, some of which is here on HN participating, any attempt to avoid doing so is impossible if you want to question their beliefs. (I support this!).
It’s plainly apparent that you have an opinion, or else you wouldn’t be interested in these questions at all. Consider reworking your approach to more clearly state why this matters to you personally and what you’re advocating for. For example, ‘I think private equity is operating under the false assumption that they benefit quality of life, aka trickle down, and that we should disprove that’. (My example is not intended as a valid expression of your opinion, it’s just a stylistic sample.)
You assume that they are secretly advocating for something, on the basis that quality of life isn't something private equity cares about (according to your own assumptions). Even if it isnt, so what?
I took would be interested in seeing the proposed model of the different scenarios and I am also not secretly advocating for any particular outcome.
What I’m curious about is if you moved all of it to cutting the national debt by 1/3, what happens? Is there a new lifeline for the nation’s economy?
I regret that I lack the vocabulary to express my position on this. “Go fuck off” doesn’t capture it.
Taxes and institutions could help achieve this, but I also like how Bill Gates has been doing things; but the scale of effort like this and by the billionaire club is paltry and usually political to our collective detriment.
But hot-takes are another matter:
4 is basically #1: Every "non-traditional" investment can be made into an ETF (and for that matter, mutual funds) provided it aligns with SEC and/or exchange rules. Still, PE funds probably won't get a lot of takers by individual company's fund admins even if they're allowed. They're quite conservative, and rightly so.
2 & 3 would both cause the equivalent of modern bank runs. American financial institutions would be in tatters.
And as an individual why not? I can withdraw from a 401k, with just a 10% penalty plus income tax. Rationally, this is still better; especially if the highest tax brackets are favorably cut-down thanks to our conservative madmen. Which means the safest course of action is to withdraw it in chunks; then place it into safer investment vehicles and nations.
Of course, what would really happen is something more catastrophic as this withdrawal dovetails from thousands to millions.
Finally, with so many nations and wealthy also invested into the US, this then turn into more than just a US problem as it becomes hard/impossible to offload US financial assets.
I’d prepare for a rough decade. Focus on paying off the mortgage more than than the advice that you typically get in the past.
Otherwise, I agree it will be rough.
The reason why this is happening is because some institutions have been extremely successful doing this. I assume you are familiar with the ones like Ontario Teacher's (because they seem to own everything) or endowments but has also been true for Superannuation funds in Australia. In the latter case, they have (I believe) the highest levels of average wealth (higher than the US) but incomes that are lower, largely because of Super funds.
Speaking generally, one of the biggest drivers of wealth inequality is that the rich have access to financial products that go up in a straight line, and other people do not...despite "other people" in aggregate holding most of the wealth. Germany is one of the most famous examples of this, GDP per capita is very close to the top ten, median net financial wealth equal to Greece. Saving options are non-existent so everyone is funneled into deposits, and the banks take that money and give it at -2% to a billionaire (whose family got suspiciously and suddenly very wealthy in the 30s). China is effectively the same model but Germany is a bit more notorious...because people continue for vote it.
The alternative is Singapore, everyone knows this model cannot work with US politics (to keep it brief). So what is happening is the obvious thing to do.
Same thing is happening in the UK under a left-wing government btw. The US is already somewhat ahead of the curve in that their exists a deep pool of people who have decades of experience running funds for savers and institutions this way (again, people in the US miss this context...the UK is doing a similar thing, the issue is that there is almost no-one with this experience). It is right to say plan sponsors should do this, the statements by Biden and Trump quoted are both correct (and not contradictory). As the article points out, DB plans have used these for decades shrug
However, there is also stuff here that is also known bad: it sounds like they want to incorporate this into funds that offer daily liquidity...how did CEFs work for PE funds pre-08? Not good (the solace with this kind of thing is that PE funds lose out just as much doing this, it is a bad idea that has failed every time but they just can't resist).
https://www.visualcapitalist.com/a-visual-breakdown-of-who-o...
https://www.oxfamamerica.org/press/press-releases/worlds-top...
Guess it's time to roll over the 401(k) to my new job and take a more active role in managing it - I want it almost all explicitly in the market (and not in private equity) at this point in my life.
Thanks for posting this, my retirement funds are a big deal to me and I hate that people less informed will probably be screwed by moves like this.
I mean, you will still have x and xai and the upcoming openAi-for-profit-corp, tesla and meme coin exchanges on your portfolio.
> As of now, there’s nothing to prevent 401(k) plans from adding private equity investments if they feel the benefits outweigh the risks.
401(k) plan administrators already can offer this crap, but nobody's asking for it, and most of them, so far, are not stupid enough to default retirement savers into them. And even if P.E. do manage to muscle/bribe their way into a 401(k) administrator's offerings, nothing stops me, as an investor, from allocating my assets into public-markets-only funds.
My employer's 401(k) administrator could choose to add all sorts of crazy funds to their menu--I'm not choosing any of them. If I had more money, maybe I would even try them. Something like <1% into a crazy private equity black hole might make sense if I was already set for retirement, and could afford to lose it.
The bottleneck, as I understand it, is contribution limits for people who dont have a 401k to start with.
nothing to do with your techie 401k were anything resembling even the word syndicate won't apply.
Case in point: Sometimes you get extremely large fund managers like Fidelity buying into absolutely ridiculous investment rounds for pre-IPO companies. Why?
Because the hedge funds/VCs, etc will promise Fidelity first grabs at OTHER companies in their portfolio. Like, "if you invest in X now at this ridiculous valuation, we'll let you invest in Y, Z and W as well." I've seen so much of this type of mutual backscratching in hedge funds and PE, but no one seems to care.
I've seen some PE companies force one of their portfolio companies to take a very terrible loan that they didn't need at a rate that was terrible. Why? Because the bank would give better deals for their other portfolio companies now and in the future.
The people left holding the bag are the investors, and Fidelity and their ilk don't give a fuck, because their AUM is huge, so what if they waste $100M on a shitty investment? SEC turns a blind eye to all these shenanigans and investment bankers make their money and fund managers make money and the only ones left holding the bag are the retail investors.
To me it "feels" like the last 2 decades of easy money and lack of investment into building entrepreneurship as a whole has led to a place where theres a lot of good money chasing two few deals or bad investments. That is to say the growth machine is responding to bad inputs over the last 25 years. To make matters worse there are only 2 possible solutions to any problem now: Technology or Regulation.
These are hot takes/ observations though. I'd love to know what the average retirement is built out of, what its return has been. What has happened Entrepreneurship over the same time, and what has happened to VC/hedge fund returns in the last 10 years. If anyone has deeper expertise I would love to learn more.
Ben Felix, investment officer at a Canadian wealth management firm, did a video on the topic a few years ago and concludes that net-of-fee returns aren't much better index funds—and you have to deal with illiquidity:
* https://www.youtube.com/watch?v=Ik169Fd_G1E
He links to the published papers that he used in his analysis in the description.
He also co-hosts the Rational Reminder podcast, and private equity has come up on a few episodes:
Sure, PE firms want access to that $12T market, but let’s be real: this is about locking in long-term capital with limited transparency and even more fees. The risk/reward profile is completely different from stocks/bonds.
And it’s all being decided over a Zoom call between megafunds a week before Trump’s second inauguration. Not a great look. But unfortunately this is towards the bottom of the list of egregious shit that has happened in the last couple of months.
But will it be the younger millennials, gen-Z, and younger generations cleaning up the mess? Or will it be Gen-X and older millennials out in the streets and homeless? Or something else?
The young generation asked how they were handed a bag of problems. This is their moment to help decide how to address the problems of tomorrow, because it’s a battle to do so and policy changes and consequences are by design invisible to the typical worker.
Here we are with elders (corporations and politicians really) creating many opportunities for themselves to suck the life out of younger people.
We collectively fucked around and exported our assets and the our smarts. Now we find out.
https://www.youtube.com/watch?v=xnWYh7N5goE
It scared me because my parents were looking into a buying into a retirement community where you have a "guaranteed" payout amount depending on how many years you stay; that payout amount slowly declines over time to something like 80%.
The deal is clear. Pay a bunch of money to buy in. Pay pretty high monthly maintenance fees. They handle everything else. Food, medical care, etc. If you need long term care, dementia, etc.
Then if/when you want to move out you get between 100% and 80% paid back out, depending on when you leave. (And, presumably, it works the same way for your heirs).
They make money on:
* The spread between what you pay as maintenance fees and what it actually costs to support you
* The (hopeful, for them) appreciation in the market value of the housing you 'buy' (which is an incentive to keep the community desirable).
* The decline in "ownership" % you have over time.
And of course ultimately they're gambling that you won't have an incredibly long, expensive decline, but will die relatively quickly once the costs mount.
This all makes sense, because it's a form of risk pooling.
But it was infuriating that someone could come along and buy out the place and just alter the terms. I still don't understand why/how it's legal, it seems like that should only be allowable under something like bankruptcy.
Who’s richer?
This is the same at every level of society. Those millionaires buying a comfy retirement have never been worried about the bottom rungs of society and the lack of legal support, healthcare, the difficulties with police etc
Turns out that the forces that drain the working population are now after the comfortable ones. Won’t take long for exponential growth to eat through the 50-90%ile, and in 10-15 years it will be the 90-99% that are bled dry, and 5 years after that the 1% start cannibalising themselves.
It’s inevitable.
Maybe some kind of offering they could do where the public gives them money in exchange for rights to portions of future profits?
Why would someone have trouble sleeping at night?