Most investors would jump at the chance to invest in an asset that consistently outperforms the stock market and provides relative shelter in a downturn.
Unfortunately, they can’t. Rules bar 98 percent of American households from directly investing in private equity funds, even though those investments, on average, have consistently delivered better returns than the public equity markets for the last 25 years.
That is starting to change, thanks to the leadership of Securities and Exchange Commission (SEC) Chairman Jay Clayton and Secretary of Labor Eugene Scalia. The Department of Labor just took a big step toward modernizing defined contribution plans and providing participants with a more secure retirement by issuing the first clear guidance that allows private equity investments to be offered to employer-sponsored retirement plans that invest in multiple asset classes. This will allow more hard-working Americans to invest in private markets to diversify their portfolios and collect those exceptional returns.
This will allow individual investors to capitalize on businesses’ increased reliance on private markets. In 1996, there were more than 8,000 publicly traded companies in the United States. By 2018, that number had nearly been cut in half. On the other hand, the number of private companies in the United States has increased 52 percent since 2012 according to Hamilton Lane’s 2019 Market Overview.
More companies are choosing to stay private because they can prioritize long-term growth instead of having to meet quarterly earnings demands. This means that most investors only have access to larger, more mature companies, instead of the dynamic fast-growing startups and dynamic companies that often remain private.
As interpreted by the SEC, the Securities Act of 1933 has always imposed restrictions on private placement offerings. Over time, those limitations made it harder for individual investors to maximize their savings for retirement or their children’s college funds, in part because private equity investments are available only through private placements. Instead, wealthy individuals and large institutional investors like public pension plans benefited more directly from private equity’s phenomenal performance.
According to a report released today by the American Investment Council, private equity delivered a 13.7 percent return for public pension funds over a 10-year period, outperforming the 12.7 percent return delivered by public equity over the same period. Because of this impressive track record, public pension funds, university endowments and other large institutional investors routinely depend on private equity to meet their obligations. According to the same AIC study, public pension funds invest 9 percent of their portfolios in private equity. CalPERS, the nation’s largest public pension fund, recently announced plans to invest more in private equity.
Prior to the Labor Department’s new guidance the rules prevented most investors with 401(k)s from investing directly. As a result, the vast majority of individual retail investors are missing out on those superior returns. Fortunately, the Labor Department’s new guidance will start to enable more main street investors to gain access to private equity’s higher returns if their plan fiduciaries voluntarily make private equity investments available.
In addition to delivering stronger returns, private equity investments reduce risk. A recent study from the Institute for Private Capital found that portfolios containing private equity delivered higher returns and lower overall risk for investors.
SEC Chairman Clayton has acknowledged that more and more businesses depend on private markets and is right to explore ways for all investors to access that market. This guidance from the Department of Labor finally gives Main Street investors access to the same types of high-performing investments as big institutional investors, all within the safety and robust investor protections of their 401(k) plan. This is a win for savers and a major step forward for our retirement system.
Drew Maloney is the president and CEO of the American Investment Council
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