The private equity market has long had its eyes on access to the trillions of dollars in the 401k plan market, which has been reluctant to include PE investments as investment options for plan participants due to legal and operational concerns.
The Department of Labor (DOL) eased those concerns with its June 3 Information Letter providing guidance to help 401k plan sponsors add private equity investments in diversified investment vehicles, such as target date funds (TDFs), without running afoul of ERISA guidelines.
This big announcement effectively propped open the door that had been separating the PE market and 401k plans. Let the wave of 401k plans investing in private equity begin, right?
Actually, it looks like that wave might amount to little more than a trickle for the time being, according to a new analysis.
In its recently released 2Q 2020 US Private Equity Breakdown, private and public equity markets data provider PitchBook says the ruling “may not lead to the tidal wave of cash” some had been anticipating.
“Any changes to target date funds are likely to take years and the PE will only account for a minor share, meaning access to retail accounts may not be the spark that some GPs [General Partners] had been hoping for,” PitchBook said in a statement announcing its Q2 2020 findings.
In its analysis, PitchBook notes that approximately one-third of all 401k assets are in target date funds, although that should rise over time because more than two-thirds of each new contribution tends to go into target date funds.
“In addition, of the approximately $2.3 trillion in target date funds, only half is in equity, or around $1.1 trillion. Numbers being floated suggest target date funds may seek to invest 10-15% of their equity allocation into PE funds, or around $100.0 billion-$150.0 billion,” PitchBook states. “However, the annual lift in PE fundraising will be much smaller because any modifications surrounding target date funds will take years.”
PitchBook’s analysis says that while the inclusion of PE in retirement accounts had been legal for several years, plan sponsors thought the risk of lawsuits over fees in retirement accounts outweighed any benefit of including PE funds. Now, with the DOL effectively greenlighting plan sponsors to include PE in vehicles such as TDFs, PE firms do have additional access to the $6.0 trillion+ 401k market but most plan sponsors aren’t ready.
Some are, though. Remember that the June 3 DOL information letter was in response to a Groom Law Group request on behalf of its clients Pantheon Ventures and Partners Group, who have already developed private equity strategies that can accommodate DC plans.
In a statement released June 3, Pantheon said PE strategies have the potential to address the performance delta between DB and DC plans and merit consideration as a viable investment.
“In our view, retirees really can’t afford to leave 40 basis points annually on the table over a 35-year investment horizon,” said Susan Long McAndrews, partner and member of Pantheon’s partnership board. “We believe the department’s action [June 3] is an important step to address this and we look forward to working with plan sponsors to offer millions of ordinary working Americans the potential for a more secure retirement.”
Also, Vanguard has teamed up with HarbourVest to offer PE access, although Vanguard has limited access to institutional clients (i.e., pensions, foundations and endowments) for the time being.
“Private equity will complement our leading index and actively-managed funds, as we seek to broaden access to this asset class and improve client outcomes,” said Vanguard CEO Tim Buckley in a Feb. 2020 statement, adding that Vanguard aims to expand access to investors in additional channels over time.
PE activity slowed in Q2 2020
PithcBook’s report found that through the first half of 2020, U.S. PE dealmaking decelerated as dealmakers felt the impact of the coronavirus pandemic, with 2,173 deals closed totaling $326.7 billion. That’s nearly 20% decrease in deal value compared to this time last year.
Quarterly figures show an even steeper fall, with Q2 2020 deal value down more than a third from Q1 2019 values.
“Following the first full quarter where global economies experienced the impacts of the COVID-19 pandemic, many PE firms are in triage mode and trying to determine which portfolio companies to save, rather than looking to sell,” said Wylie Fernyhough, senior PE analyst at PitchBook. “There are still a lot of uncertainties as to what the coming quarters will hold, but PE fundraising remained healthy through the first half of the year. A couple mega-funds launched in Q2, exhibiting confidence that LPs [Limited Partners] will find success despite the challenges brought on by the coronavirus, but the same cannot be said for nascent managers.”