
Private Equity Investing Now Allowed in 401(k) Retirement Funds - joeyespo
https://news.bloomberglaw.com/employee-benefits/benefits-overseer-oks-private-equity-investing-by-401k-holders
======
mywittyname
Can we now subject large "private" firms to the same scrutiny that "public"
have to obey? I always thought it was ridiculous that you could call a
trillion dollar company with millions of shareholder, "private."

From the sounds of it, this ruling handwaves away the inherent risk of
investing in a company whose finances you have no visibility into by claiming
that putting it into a diversified private fund is the same as a diversified
public fund. Which is fine, but they should be subject to the same reporting
requirements as public companies.

These regulations didn't appear out of thin air. The business world is full of
evil people looking to rob everyday investors. See: Enron.

~~~
airstrike
I believe the assumption is the fund manager is the kind of investor that will
have the ability and resources to do proper due diligence before investing,
contrary to the case of public companies that can sell stock to the average
Joe

~~~
pottertheotter
But now the issue is due diligence of the GP, the fund manager. I think that's
what OP is talking about. PE firms don't have the same level of disclosure
requirements as public companies (with the exception of those that are now
public companies), and you need to research a fund just as you would research
a stock.

Fund investors are usually family offices, endowments, foundations, fund of
funds, secondaries funds, etc., and they all do a huge amount of due diligence
on prospective fund investments. It's just as much work to research funds as
it is to research public equities.

For reference, I have been an investment professional at both a PE firm and a
hedge fund.

~~~
airstrike
But similarly, to my knowledge only accredited investors may invest in PEs /
HFs, and shares in those funds are special kinds of securities that differ
significantly from those covered by SEC / blue-sky laws and therefore are not
subject to the same disclosure requirements. It's not in anyone's interest to
treat these different types of investments as if they were similar.

I'm not in PE per se, but would think investment in one is through an
investment contract which is an exempt security

~~~
pottertheotter
Totally agree. Just if they are no longer for only accredited investors, there
should be increased disclosure

------
JMTQp8lwXL
Private equity isn't an appropriate asset class for 401(k)'s. Public markets
have a threshold for rules/regulations and reporting requirements.

You don't want your retirement account to be a casino. You want companies that
can provide stable, long-term growth of your portfolio-- so the money's there
when you need it.

~~~
logicslave
Private equity is commonly how the rich got rich. Theres all sorts of asset
classes not available to the common public that keep them from reaping
rewards. Another being investing in catastrophe bonds and insurance. Tons of
fortunes made off all sorts of financial assets, that really arent that
esoteric, they are just in the shadows.

~~~
rabidrat
"how the rich got rich" is survivorship bias. Private equity is also how many
people lost some or all of their life savings. I myself have "invested" tens
of thousands of dollars in a few startups that have actually gone on to be
moderately successful. But my equity has been so diluted that I will be lucky
if I get back half of my original investment. The game is heavily biased
towards the last shark in the pool, and I am not a shark.

~~~
charlesdm
Startup investing isn't private equity. Private equity is acquiring a
profitable company with limited equity and a pile of debt, paying it down, and
selling it at a profit.

~~~
wtvanhest
Startup investing is a subset of private equity investing.

Pe includes many illiquid subcategories including real estate, LBOs, startup
investing, even niche stuff like infrastructure investing

~~~
JumpCrisscross
> _Startup investing is a subset of private equity investing_

Not as the term is used in finance. Venture and PE are separate asset classes.
Venture-like assets can become PE-like, in the same way private equity can
become public equity. But PE is based on cash flows and leverage; VC is based
on growth.

~~~
wtvanhest
Not according to the CFA Institute, or any number of other sources. LPs may
incorrectly label PE and VC as separate subsets, but most large, institutional
LPs will have PE, then separated by type.

CFA is the best source, but there are so many others, including my
professional experience at a major asset manager.

[https://www.cfainstitute.org/en/membership/professional-
deve...](https://www.cfainstitute.org/en/membership/professional-
development/refresher-readings/2020/private-equity-valuation)

> Definitions of private equity differ, but in this reading we include the
> entire asset class of equity investments that are not quoted on stock
> markets. The private equity class stretches from venture capital
> (VC)—working with early stage companies that in many cases have no revenues
> but have potentially good ideas or technology—all the way through to large
> buyouts (leveraged buyout, or LBO) in which the private equity firm buys the
> entire company. In some cases, these companies might themselves be quoted on
> the stock market, and the private equity fund performs a public-to-private
> transaction thereby removing the entire company from the stock market.

------
peter303
Didnt Mitt Romney shield a fortune from taxes by wrapping Bain Inc deals
inside IRAs? Sounds kind of similar.

~~~
drocer88
IRA withdrawals are taxable at income rates: 37% for that kind of jack. He's
delaying rather avoiding. If he was really smart, he'd have done this outside
of a retirement account and paid the 20% capital gains rate.

~~~
whitepoplar
He did it in a Roth IRA.

~~~
drocer88
Did he? All I can find is that it was a SEP-IRA :
[https://www.forbes.com/sites/forbesfinancecouncil/2018/08/03...](https://www.forbes.com/sites/forbesfinancecouncil/2018/08/03/mitt-
romneys-retirement-account-makes-case-for-roth-iras/#34ff0702215a)

"At the time, Mr. Romney was not able to use a Roth IRA to make these
investments because his income tax bracket exceeded the allowable threshold."

------
throwitawayfam
Can someone set up a "professionally managed fund" where you can set up an
LLC, have the fund invest your 401k in that LLC, pay yourself a salary equal
to the amount invested? Bypassing early withdrawal fees for some nominal fee?

~~~
BeetleB
I suspect you phrased this poorly:

1\. I set up an LLC.

2\. I have a regular job which is earning me income.

3\. I put some of that income into a 401K.

4\. I direct the 401K to invest in my LLC.

5\. As the guy running the LLC, I take that amount of money and pay myself a
salary equivalent to what I put in.

How is that money ever going to grow? What's the benefit? You didn't pay
taxes? Pretty weak benefit, IMO.

There is such a thing as self directed retirement. People buy real estate with
it all the time. The regulations require, though, that any profits made out of
it must go back into the retirement account until you're old enough to
withdraw. I could use retirement money to buy a broken house, fix it up, and
flip it. But all profits have to go back into that account. I cannot keep any
for myself.

~~~
throwitawayfam
I did word it poorly, and you captured what I was trying to get at (thanks).

The benefit is for people that need to withdraw from their 401k before
retirement without getting hit with the interest/fees. I guess another part of
the benefit is if you want to take advantage of employer match but you don't
want to invest in your 401k.

I didn't know about self directed retirement. I'll have to go do some
research.

~~~
BeetleB
Well, avoiding taxes, and getting employer matches are the benefits, but you
haven't explained how the amount will grow. You haven't invested it in
anything.

------
mancerayder
Don't many (most?) private equity funds have very very long horizons, like 10
years? And perhaps that's a mitigating factor to the opaqueness?

~~~
Havoc
12 is common though many allow for a couple of extension years to sell the
stuff

------
bpodgursky
For those against -- do you really prefer that only well-connected
billionaires are allowed to invest in startups, and actually capture the rapid
growth?

Most unicorns (and no, they aren't all scams -- many are pretty stable, or
exited successfully, a la LinkedIn, Salesforce, etc) were private until they
were worth tens of billions. Any gains post-IPO are small multiples of the
original investment.

The only people able to invest, and actually capture that growth, were already
wildly wealthy. Do you think that's fair?

~~~
JMTQp8lwXL
I'd consider permitting it outside of 401(k) funds. But the quality of private
equity investment opportunities offered to middle class people != the quality
offered to folks like Tiger Woods, who investing in Google's Series A back in
'99.

------
bufferoverflow
I'd buy SpaceX stock, if Elon would allow.

~~~
toomuchtodo
[https://blog.sfgate.com/pender/2015/03/25/see-which-
fidelity...](https://blog.sfgate.com/pender/2015/03/25/see-which-fidelity-
funds-invested-in-spacex/)

~~~
wcoenen
I believe none of the Fidelity funds have even a 0.1% weight for SpaceX. (I
haven't checked recently and I can't read the blog because of HTTP 451, but I
don't think this has changed.)

I criticized buying Google in my other comment, but at 0.29% it's actually
better than the Fidelity funds in this regard.

------
kchoudhu
I can't buy OTM options expiring tomorrow in my 401k and somehow PE is
allowed?

------
JustSomeNobody
Sigh. Just another avenue for wealth transfer. Thanks Trump!

------
ars
This opens up some excellent tax avoidance strategies.

I'm assuming this is available also for IRA and Roth IRA. What you do is setup
two transactions: One that will lose money in the IRA, and the other that will
gain in the Roth IRA. (A straddle.) Make sure you execute both at the same
time (if it's a thinly traded security you can end up trading with yourself,
but that's not necessary).

Then sell, and do it again.

You effectively move money from IRA to Roth IRA. (And yes it's legal, I
contacted the IRS and asked.)

In the open market you can only move a small percent at a time, but with
private equity the gains and losses are much greater and you can effectively
move all your money.

~~~
drocer88
Is this assuming you can pick winners?

~~~
perl4ever
...and if you can, why bother with the losing side of the transaction?

Conversely, if you can't pick winners, then I think you can only set up a pair
of trades which _sometimes_ moves money in and sometimes out, with a net of
zero.

I tried making charts of option prices in Excel and didn't come to any
particular conclusion, except that maybe you always lose because of the
dividend rules, spread, and commissions, and it seems like the maximum
expected value is at-the-money.

It makes me think of violating thermodynamics with Maxwell's Demon.

If you trade with yourself, then it would be uninteresting plain fraud, and if
you don't, I have the feeling the market will prevent you from getting
anywhere.

