Private Equity Gets a Big Win With U.S. Nod to Tap 401(k) Plans

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Oh hey its the op who is completely unbiased against private equity huh? Don’t understand when yesterday you were talking about how only the rich and “gilded-age” bs of society could invest in PE creating oligarchs of the US but now that ordinary people have an option to invest in PE you’re against it. Interesting…

Drumb2bBass

I know the PE guys are slick but any chance that this may lift the veil on performance and fees a bit? I know that I’m not directing part of my 401k without a proven track record and competitive fee structure. Though these PE funds are masters of funny math when it comes to getting themselves paid.

Snakealicious

Why is it such a bad thing that retail investors now have access to private equity funds through their 401k plan? PE, on average, has stronger returns with lower vol. everyone here seems to hate PE for some reason? I guess that’s because it’s not your vanguard index fund with basically a 0 expense ratio. Yes there are risks associated with investing in PE, as there are with all investments. Investors should be educated and understand the illiquidity of the program along with the unique risks with investing in the private market. This is a good thing for investors and it provides another source of capital for fund managers- it’s a win win. And If you’re familiar with the PE and alternative space as a whole, these types of investment vehicles have become increasingly accessible to lower net worth investors in recent years and this actually allows them to place their illiquid investments in the proper illiquid account. Funding capital calls may be problematic/tricky for some investors in a 401k account where contributions are capped annually (some interesting funds nowadays don’t even use the traditional capital call structure ie. Partner’s Group), but that shouldn’t be a reason to paint this positive as some sinister act coordinated by the wealthy elite. To me, it sounds like the Robin-hood reddit investors who praise Vogel and buffet aren’t too familiar with the asset class. I’ve sold investment products my entire career and for years I was incentivized to sell products that I would never want my parents to invest in. I will gladly assist them with selecting the proper PE strategies in their 401k accounts, and I will certainly utilize them myself

Edit: the superior performance to public markets is NET of fees

LordGreens23

This is effed

quarantinedExtrovert

I’m not sure this matters much. Plan sponsors have fiduciary duty to responsibly mange their 401(k) fund line-up. I can’t see many wanting to take on the risk of adding a PE option. You’re asking to be sued for breach of fiduciary duty when it eventually falls apart.

Server6

John Hempton: What Makes Shorting Frauds Fundamentally Very Dangerous

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TL;DR Fraudster CEOs can simply increase their level of fraudulence which would mean a big loss to shorts.

Zigxy

So it’s just the old saying, “the market can stay irrational longer than you can stay solvent”.

DungeonMinter

Stonks only go up

Brass14

John Hempton is my second favorite writer of financial wisdom on the internet. I love his stuff. Search for “Bronte Capital Blog”

He runs a hedge fund in Australia that shorts mostly Chinese fraudulent companies. Which yes, ain’t easy waters to navigate.

Sevro_andthe_howlers

Can someone explain the numbers in the post and how he became 95% in the position and why / how the bank would approach this

1sweets

A dollar crash is virtually inevitable – Stephen Roach

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” His timeline is rough — over the next year or two, maybe more. ”

Just short enough to make people panic, but long enough that people will forget when he’s wrong. Take a hike bro

VegaGT-VZ

I have a lot of respect for Stephen Roach, but I have a honest question about any claims on a Dollar Crash: The Dollar would crash against what currencies exactly? It seems that the ECB, The bank of Japan and the Chinese are just as willing to print and to prop their economies as we are.

cambeiu

Correct me if I’m wrong, but isn’t global demand too high for that to happen?

drgoddammit

The crash of the USD has been “predicted” since “Nixon shock”. But it’s easy to say shit like this. I can tell you two things with absolute certainty.

1- the dollar WILL crash.
2- it won’t happen today.

MultifactorialAge

Dont let my nickname to trigger you but on this sub it’s reasonably to expect to have reasoned conversation about what’s next when/if dollar crashes?

Is there any good substitutes to dollar system?

xrp_make

Private equity barons grow rich on $230bn of performance fees.

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The fact that the article admits these are “performance fees” and at the same time confuses the performance of these funds (which have clearly made significant returns above their hurdles, otherwise there is by definition no performance fee) with the industry average private equity fund returns (which are much lower) suggests to me that this is yet another “PE make money therefore bad” article. That’s before you get to the “owner of successful PE business does very well” non-story.

There is a lot wrong with the PE model. There’s a lot wrong with society where rampant PE style incentivised capital gets deployed and there are lots of unfortunate side effects that the individual billionaires in this article don’t give two shits about provided they get their fees. There’s also an argument that PE as an industry does far more good than bad, and a lot of academic evidence that agrees with that basic premise or individual claims (e.g. re whether PE ownership on average improves worker productivity, whether outperformance is all or largely a debt phenomenon etc.). As with any area of research that is (a) relatively new (b) has relatively few dedicated researches and (c) relatively little data, it’s a nascent field. A look at any of these would make for an interesting article.

But the crux of this article is that investors who agreed to pay fees to PE managers if a certain level of performance is achieved have now paid those fees to the successful managers and those managers are even richer than they were. I don’t see that is very interesting.

Edit: clarified the second para. Thanks /u/ibbbz

firstLOL

A handful of super wealthy multibillionaires have accumulated vast riches from running private equity funds that have performed no better on average than basic US stock market tracker funds since 2006.

The number of private equity barons with personal fortunes of more than $2bn has risen from three in 2005 to 22, according to a new analysis which estimates investors paid $230bn in performance fees over a 10-year period for returns that could have been matched by an inexpensive tracker fund costing just a few basis points.

“This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance,” said Ludovic Phalippou, professor of finance at Oxford Saïd Business School.

The biggest winners have been the founders of Blackstone, Apollo, KKR and Carlyle — the four largest private equity managers. Stephen Schwarzman’s personal fortune of $17.7bn ranks the Blackstone co-founder as the world’s 29th richest billionaire, according to the annual Forbes list. Leon Black’s $7.7bn fortune ranks the Apollo founder at 63rd, while George Roberts ($6.1bn) and Henry Kravis ($6bn) of KKR rank as the 108th and 112th richest billionaires. David Rubenstein, Carlyle co-founder, is at 275th place with an estimated wealth of $3.1bn.

Private equity contracts are complex and opaque with little public information disclosed about fund performance. But claims that illiquid private equity strategies deliver markedly superior performance to public markets have attracted huge inflows from institutional investors including pension schemes, insurers, sovereign wealth funds, endowments and family offices.

Mr Phalippou’s analysis indicates that large US public pension plans earned about $1.50 (net of fees) for every $1 invested in private equity funds between 2006 and 2015. This translates into annualised returns of about 11 per cent, little different from the US stock market over the same period.

“The performance of PE funds, net of fees, matched that of public equity markets since 2006,” said Mr Phalippou.

Blackstone said that Mr Phalippou’s analysis contained conceptual errors and was deliberately aimed at producing negative conclusions. “We have delivered exceptional outperformance to our investors, including 31m US pensioners,” Blackstone said.

An alternative methodology for evaluating private equity returns, known as public market equivalent, points to similar results.

More recent vintages of PE funds since 2015 have not fully matured and were excluded from the analysis.

Low interest rates and rising valuations in the long bull market for equities which followed the financial crisis provided an ultra-benign environment for private equity managers. Mr Phalippou warned that any lengthy period of weaker stock markets could expose flaws in the industry’s expensive business model where large fees are paid every year to investment banks, consultants, lawyers and accountants along with interest payments by portfolio companies on debt raised from institutional investors.

“The private equity industry may need to rethink its business model, lowering costs and reconsidering how performance fees are paid in order to remain sustainable. This, however, will probably generate fewer billionaires,” he said.

Other recent analysis has drawn similar conclusions.

A report published in February by Bain & Company found investors did better from tracking the S&P 500 over the past decade than investing in US buyout funds.

A recent analysis of 717 private equity groups by Victoria Ivashina and Josh Lerner, two Harvard Business School professors, said the division of profits among senior partners depended on whether they were founders of the partnership and not on their record as investors.

Carlyle said that it was “inappropriate” to include other asset classes and strategies, such as real estate, energy, and long-dated private equity, with buyout funds as each has a different risk/return profile and time horizon.

“Carlyle is proud of its track record of investment performance that has enabled it to keep the trust of its investors for decades,” said a company spokesperson.

KKR said: “We are proud of our long track record of outperformance for our investors and disagree with the representations in the [Phalippou] paper which are based on flawed assumptions and selective engagement with the facts.”

WhenGeniusFail

These guys help enable innovation and business continuity, creating more ‘real’ value than tons companies that push mediocre retail services/products. Why should we care how they choose to divvy up their earnings.

Sjepe

So they created 5x that value and took some of it? Where’s the problem?

AggressiveFeckless

“Engineered crashes” is my favorite of this latest vague illogical rant.

AggressiveFeckless

WSJ: 1/3rd of investors over 65 sold ALL their stocks between Feb 20-May 15th

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The stock market has clawed back much of its losses from the new coronavirus pandemic. Ophthalmologist Craig Sklar is selling his stocks anyway.

When the pandemic hit, the value of Dr. Sklar’s investments tumbled. So did the income he earned from his private practice in Connecticut, which was forced to furlough staff and dip into emergency loans to try to keep its doors open.

At 62 years old, Dr. Sklar, who had been hoping to retire in a few years, decided he couldn’t risk seeing his portfolio take a bigger hit. He sold much of his stockholdings at a loss between January and early March.

“I don’t have 10 to 15 years left to recover my losses,” said Dr. Sklar, who still owns some stocks but now has more cash as a percentage of his portfolio than he has in decades. “At some point, I’ll need my cash to live on.”

The coronavirus pandemic has created a crisis that some economists believe could take the country nearly a decade to recover from. Individuals like Dr. Sklar now face perhaps one of the most difficult investing decisions they will make in their lifetimes: whether to wait out a potentially long rebound or exit the market altogether.

Cut and Run
Nearly a third of investors who are above the age of 65dumped all of their stocks sometime betweenFebruary and May.
Share of individual investors who sold all of theirequity holdings
Source: Fidelity Investments
Note: Data was collected from Feb. 20 to May 15.
%
AGE GROUP
60-64
65-69
70+
All
0
5
10
15
20
25
30
35
Data from Fidelity Investments suggests millions of individuals have decided to do the latter. Nearly a third of investors ages 65 and up sold all of their stockholdings some time between February and May, compared with 18% of investors across all age groups.

The stock market has defied many investors’ expectations, recovering much of the losses it suffered after the pandemic forced businesses to shut down and countries to close their borders. The S&P 500 is now down 5.1% for the year, while the Dow Jones Industrial Average is off 9.7%, despite tumbling last week on growing fears of a second wave of coronavirus infections.

Money managers who believe the stock market’s rebound is justified have attributed the rally to aggressive central bank action, fiscal policy and projections that the U.S. will be able to contain the pandemic in the coming months. Those who are more skeptical point to the worries about another spike in coronavirus cases—especially after a wave of protests broke out around the country—that could send the market tumbling again.

In many cases, those hoping to retire in the coming years aren’t waiting around to find out who is right.

Dr. Sklar has told his children, who are in their 30s, to “be 100% in equities if you can.” But he himself isn’t planning on dipping back into the stock market soon.

Dr. Sklar, with his wife and dog, sold much of his stockholdings at a loss between January and early March.
PHOTO: JULIE BIDWELL FOR THE WALL STREET JOURNAL
In Illinois, Philip Eberlin, who owns a woodwork-restoration business, has most of his portfolio in certificates of deposits and cash.

He knows from experience that, even after world-changing events—9/11 and the 2007-08 financial crisis—the stock market has always gone up again. Mr. Eberlin said he missed out on much of the market’s stunning recovery after the last financial crisis because he never figured out a time to move more of his money back into the stock market.

But he is 66. And he hasn’t worked since late March because the pandemic has dented demand for contract work in Chicago residential buildings.

With hopes to work for another two or three more years before retiring, “what I’d rather not do is invest at this point and then see the market plunge 40 to 50%,” Mr. Eberlin said.

For the most part, financial planners and advisers recommend that individuals who are approaching retirement gradually reduce their exposure to riskier assets, like stocks, while increasing exposure to more conservative investments, like government bonds.

Recovery
Stocks have made up much of the ground they lostafter the coronavirus pandemic triggered a marketselloff.
Index performance this year
Source: FactSet
As of June 16, 5:19 p.m. ET
%
S&P 500
Dow Jones Industrial Average
Jan. 2020
June
-40
-30
-20
-10
0
10
What they don’t typically recommend is pulling out of the stock market altogether.

“When you sell, you have to be right two times: right that the market is going to keep going down, and right that the market is going up when you get back in,” said Sarah Catherine Gutierrez, a certified financial planner based in Arkansas. “The problem is, very few people can be that right.”

But Ms. Gutierrez acknowledges the impulse to sell can be overwhelming—especially for those who don’t have as big of a cash reserve to fall back on during economic downturns.

One of Ms. Gutierrez’s clients had planned to sell his business to help supplement his retirement nest egg. When the pandemic hit, potential buyers pulled out, and the client had to put aside his retirement plan.

“We feel so much compassion for this age group,” she said. For many, “it feels like their dreams are being postponed at best.”

‘I don’t have 10 to 15 years left to recover my losses,’ said Dr. Sklar, who now has more cash as a percentage of his portfolio than he has in decades.
PHOTO: JULIE BIDWELL FOR THE WALL STREET JOURNAL
Both Dr. Sklar and Mr. Eberlin said they consider themselves more fortunate than most.

Dr. Sklar has been able to pick up telemedicine shifts that allow him to talk with patients over the phone.

And Mr. Eberlin has been able to hold up, in part because of his savings and because of his wife’s job as a schoolteacher.

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“When you think about how many people in the country have very little in savings and retirement, I am blessed,” he said.

But Mr. Eberlin still feels a sting of regret, especially having sat out the nearly 11-year bull market that began in 2009 and missed out on much of the stock market’s resurgence the past few months. With the future of his job up in the air, he isn’t looking to make any drastic changes to his portfolio soon.

“I wish I had a crystal ball,” he said.

SHARE YOUR THOUGHTS

How has the coronavirus crisis affected your retirement plans? Join the conversation below.

suzanneov

Terrible to hear. You’d think lessons about holding through these types of events from 08-09 would still be fresh. I didn’t read the article you attached, so hopefully there’s a caveat that their portfolios were appropriately balanced and the 100% of equities represented a smaller fraction of their holdings.

numberpack17

Most probably did it out of panic, but if these seniors had serious money and could sell to guarantee their retirement then power to them. Sure on average its a bad decision but who am I to judge.

To be fair a lot of them should have been deleveraged and holding little equity at that point.

Zigxy

Ideally, folks over 65 shouldn’t be holding too much in equities to begin with

landodyrbeasts

These are the type of people who should pay 1% asset management fees to prevent them from emotional decisions where they sell at major losses.

piathulus