Trump could reportedly sign an executive order soon allowing retirement plans to invest in private equity.
Private equity firms have lobbied the administration for access to the $12 trillion 401(k) market.
Experts are concerned about the added risk that private equity investments could introduce to retirement portfolios.
Thanks to President Donald Trump, your retirement plan could soon include a mix of stocks, bonds—and private equity investments.
The Wall Street Journal reported on Tuesday that Trump is expected to sign an executive order in the coming days allowing 401(k) plans to invest their assets in private equity.
It’s a proposal that’s raising red flags among some investment experts, who say a 401(k) should typically be a simple and relatively low-risk investment vehicle. Private equity investments, meanwhile, are often concentrated in a small number of portfolio companies, illiquid, and carry valuations that can be difficult to measure day-to-day. They’re also much less liquid than stocks and bonds.
Trump’s green light doesn’t come as a surprise to those monitoring the private equity space, but it’s concerning nonetheless.
“Private equity kind of always gets what it wants in Congress, but I think it’s a bad idea,” Jeffrey Hooke, professor at the Johns Hopkins Carey Business School, said. “It’s illiquid, the fees are very high. Private equity funds, for the most part, don’t beat the stock market.”
“I don’t think it’s a good investment for the rank and file retail market,” Hooke added.
The push to include private equity in retirement plans is just the latest development in a long-running trend of combining public and private markets.
The private equity industry experienced explosive growth during the pandemic as firms bought up portfolio companies with cheap debt. But now, as higher rates stymie private equity dealmaking, firms are eyeing a liquidity opportunity: gaining access to the $12 trillion 401(k) market.
Brian Payne, chief private markets and alternatives strategist at BCA Research, described this development as “an exit ramp for the current situation going on for private equity.”
Traditional exit opportunities — such as selling to a public company, another private equity firm, or going public — have dried up.
According to a PwC analysis, between 4,000 to 6,500 private equity exits have been delayed in the last two years, and the firm believes funds will soon be forced to sell off their portfolio companies as limited partners demand capital distributions.
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