Jonathan Foster, CEO of Angeles Wealth Management, has gotten a lot of vendor pitches for private equity index funds lately.
The Santa Monica-based RIA firm, part of Angeles Investments with $50 billion AUA, has deployed about $491 million to private equity managers and direct investments between 2016 and 2021. Those clients are mainly high net worth individuals and institutions, however, and Foster said that “as a general statement, providing private equity exposure to mass affluent clients is a bad idea."
His cautionary statement came as advisory firms like Angeles are witnessing a democratization trend washing through the private equity market, with individuals expected to allocate an additional $1.5 trillion to private markets by 2025, according to a
Private equity giants have already been riding the “access to all” wave and eyeing ways to bring more investors on board for some time. Blackstone Group CEO Steve Schwarzman
Private equity has historically been an asset class reserved for big Wall Street sharks. Institutional investors such as banks, pension funds and insurance companies are usually the ones that have the credibility and volume to extract profit from the more speculative and expensive private market. Retail investors who pick and choose their own investment products have been restricted to publicly traded securities that are more liquid and transparent.
Private equity is also generally believed to produce a high rate of return that doesn’t always correlate with liquid securities on public exchanges. In exchange, retirement savers pay more and get less access and less information in return since PE funds are not registered with the SEC and aren’t subject to the same quarterly and annual reporting requirements as public stocks.
But experts are increasingly worried about the higher fees in PE funds that might eat up the higher returns. A
While certain fees associated with private equity funds are widely known — managers typically charge investors 1% to 2% of assets and 20% of portfolio gains — other charges, including transaction fees, legal costs, taxes, monitoring or oversight fees, and other expenses charged to the portfolio companies held in a fund are less visible, including unauthorized or bogus fees, Edward Siedle, a former SEC attorney, wrote in a
For advisors who have a fiduciary duty to their clients, adding private equity into 401(k) plans seems to be nothing but trouble as it comes with no proven performance advantage and grossly higher fees, according to industry critic, consultant and author of “Kentucky Fried Pensions” Chris Tobe.
“If you have underlying private equity or are seriously considering it, get an independent legal opinion (from a firm that does not represent PE firms) that the actual underlying private equity contract passes ERISA fiduciary muster. Make sure your fiduciary liability insurance covers private equity, many do not, ” he wrote in a
Private equity investments generally do not permit redemptions during the life (generally 10 to 13 years, but some as long as 50 years) of these investments. The illiquid nature also draws some concern, especially for retail investors.
“I think PE funds are dangerous if clients are buying something they don’t understand and will be locked up for a long time. They are getting the stuff that couldn't get distributed via the institutional market, and they're paying extra fees. That can't be a good equation,” Foster said. “If you're dealing with the average person who doesn't have the knowledge and access to really unique and special opportunities, then the next best thing is to just be in a long-term index fund.”
Despite industry skepticism, the Department of Labor issued a
DOL said it did not endorse or recommend such investments and noted that PE investments tend to be “more complicated, with longer time horizons, are typically less liquid, and are subject to different regulatory standards and disclosure rules than other more traditional individual account plan investment options.”
