Private Equity Is Coming for Your 401(k)

We’ve been publicizing for well over a decade that private equity does not deliver on its promise of superior investor performance. Even though returns are flagging, major former loyalists are looking elsewhere for good returns and big fund managers are resorting to dodgy measures to try to improve appearances, the industry looks set to raid yet another piggy bank, 401(k) funds.

And that is before getting to societal cost of its looting, as both the level of bankruptcies private equity kingpins leave in their wake and abuses in private equity infested industries like health care demonstrate (the explosion in surprise billing is one of a vast number of examples). And as we will soon demonstrate, private equity is now visibly underperforming to the degree that new allocations to private equity funds have fallen. The industry has been trying to push into retail for years, despite the fact that that would result in an untenable, performance-choking layer of extra fees and costs on an already unduly expensive investment strategy. To the extent that private equity owned companies actually do outperform, the fund manager syphon off the benefits. Hence the need for better marks, with conquest of the 401(k) industry a new route.

Let us briefly recap the private equity performance exaggeration story. Private equity promotes bogus valuation methods which clueless or complicit investors have accepted. One is the use of internal rate of return, which MBA finance courses decry as inaccurate and regularly exaggerating results, particularly if returns are or can be made to look favorable in the early years of an investment. In addition, private equity is the only investment strategy in the institutional investor realm in which the fund managers set their own valuations of their holding and do not have independent experts providing those marks. Private equity in particular is recognized as understating how much the value of investee companies falls in bear markets. This practice is so well known that a pension fund investor at a 2015 private equity conference organized by the giant fund CalPERS not only admitted to this practice but depicted this defect as an advantage. By making things look better than they were, these “smoothed returns” reduced the amount of bad press investors got in crappy markets.

But even if you had accepted the dodgy valuation approaches, for now two decades, starting in the mid-2000s, private equity was not earning enough to sufficiently reward investors for its extra risks and costs. Most finance professors get handsome consulting fees from private equity firms and obligingly put out industry-flattering papers, and give presentations with all the right caveats tossed in but still have an overall rosy, supportive tone. But due to a period of glory years, in the vintage years 1995 to 1999, private equity investors in the next five to ten years typically reported strong results. That was due to good pickings, thanks to a great thinning of the private equity industry after the late 1980s LBO bankruptcy wave plus Clinton era good economic performance tailwind. Too much money quickly started chasing what came to be too few deals. Oxford business school professor ascertained that starting in vintage year 2006, private equity no longer outperformed stocks, even though private equity due to its higher risks (leverage and illiquidity) was generally benchmarked as needed a 300 basis point (3%) premium to public stocks. Machinations followed, such as changing to more forgiving stock indexes for comparison, and for no justifiable reason. reducing the private equity premium to 150 basis points.

But loyalists, above all teams at big funds dedicated to private equity investing, kept committing more capital. A gander though some Financial Times headlines given an idea of what has transpired:

This tweet gives a layperson-friendly overview of some recent strategies to masquerade flagging performance. It’s a bit imprecise on a couple of key points (private equity limited partners provide equity, not debt; private equity funds do not have fixed terms but there is an investor expectation that they will have gotten all their money back at around the ten year mark) but is otherwise sound:

Tiffany Cianci reveals “Right now in America, we have more private equity firms than we have McDonald’s. That should terrify everyone”

Everyone needs to watch this video

They’ve created a massive scam that’s going to destroy everyone’s 401(k)s

THIS is why life is so expensive pic.twitter.com/L61Tdad4yt

— Wall Street Apes (@WallStreetApes) February 14, 2026

Now to 401(k)s as the next planned private equity extraction target. Bloomberg published a new detailed article and we’ll highlight some issues to inform your reading of these extracts. First is that 401(k) plans are not great deals for end investors even now. They have opaque fees, which means high. Other terms serve the fund manager at the expense of clients, such as slow crediting of the proceeds of the sale of one fund to the purchase of another, and limits on when and how often clients can switch between funds.¹ If you have paid any attention to how private equity has operated in health care, the key operators have been masterful in finding monopoly and oligopoly choke points, such as buying up all the dialysis centers in a major metro area and jacking up prices because no dialysis patient will drive far to get his needed regular treatments. So expect private equity to similarly create pricing advantage among service providers to 401(k) industry participants, increasing expenses and thus hurting investor net returns.

Second is that private equity funds will be sure to add more private equity industry offerings to 401(k) plan choices. This is guaranteed to result in more money going to private equity and private credit. Many investors “diversify” by spreading their assets across all the options, even though many of the funds will have similar return profiles and not product actual diversification. One of the fathers of the quant industry, Richard Ellis, has explained how even supposedly very sophisticated endowments do exactly that, harming their returns, so this is a pervasive error.

With private equity in particularly, the industry has succeeded in persuading nearly all investment consultants that private equity is an asset class. That is a magic term. Portfolio theory says you want to be diversified across asset classes. That puts you on the efficient investment horizon. You won’t necessarily make more money than by placing fewer bets, but you can expect lower risk.

The wee problem is that private equity is not a proper asset class. One of the key requirements is that is returns over time differ meaningfully from those of other asset classes, like real estate and bonds. But private equity is just leveraged equity. The purported difference in return profiles is due entirely to the practice of private equity funds reporting results late, typically one quarter after the end of the measurement period. If you adjust report to be on a timing apples to apples basis, it track public equities well, disproving the idea that it provides portfolio diversification.

Now to Bloomberg:

Private Equity Goes Big on Wealth Advice Firms

Buyout shops snapped up nearly 1,000 US wealth and retirement firms

Source: PitchBook

Note: The data includes private equity-backed deals of wealth and retirement advice firms

These days, private equity is entering every corner of the vast 401(k) ecosystem that ordinary Americans count on for their golden years. Industry giants, which want to sell their products to everyday investors, have hired experts from traditional asset management companies and begun to win over brand-name mutual funds. They’ve crashed conferences, co-opted trade groups and pushed for friendly regulations, according to people with knowledge of the matter. Smaller players have bought up hundreds of independent gatekeepers — consultants, advisers and third-party administrators.

Interviews with dozens of people from across the industry, from private equity executives to individual advisers, show how broad and deep the push is. Some buyout shops see profit in handling retirement plans and ancillary businesses. Others see higher-end wealth management and its more lucrative fees as an attractive target at a time when the rich keep getting richer.

Even for those not buying up 401(k)-related firms themselves, a new door is opening. Stalwarts such as Apollo Global Management Inc., Blackstone Inc., KKR & Co. and Carlyle Group Inc. want to sell their rarefied brand of investing to the masses, and the way is clear.

The private-asset industry has been lobbying for years for the government to bless the inclusion of alternative investments in defined-contribution retirement plans. In August, President Donald Trump signed an order aimed at easing access to private equity, real estate, cryptocurrency and other alternative assets in 401(k)s. Now, much-anticipated guidance from the administration is expected any day..

Short term, the timing looks iffy for Main Street. Pension funds and endowments that have long powered private equity have begun to pull back. Returns don’t look as good as they used to.

Private Equity Fundraising Has Slowed

Alternative asset managers find it harder to raise money

Source: PitchBook

Note: Capital raised in the US

The article notes (at least as of now) a disconnect between retail investor appetite and private equity industry ambitions:

Trouble is, most 401(k) investors seem perfectly fine with the options they have. Only a handful of plans have said they plan to add private assets to their menus. Many advisers say the companies they work with have no interest in the debate, or lack the understanding of what private markets are…..

Even mutual-fund stalwarts like T. Rowe Price are getting into the act. Long a 401(k) fixture, Baltimore-based T. Rowe has teamed up with Goldman Sachs to create private-asset funds for retirement accounts. It’s also held exploratory talks with alternative investment managers about incorporating private assets into established retirement accounts, according to people familiar with the matter. T Rowe declined to comment. BlackRock Inc., State Street Corp.’s investment arm and even Vanguard Group are launching their own private-markets funds.

Change is afoot across the retirement industry. Take insurance broker HUB International. Over the past decade, HUB has added plan consultants in California, retirement advisers in New York, wealth managers in Florida. The coast-to-coast spree has put 10,000 401(k) plans and $178 billion of assets under its purview. A key motivator: its biggest shareholder, private-equity firm Hellman & Friedman, whose past conquests include Levi Strauss & Co. and DoubleClick Inc.

Brian Collins, chief investment officer of HUB’s private wealth and retirement business, acknowledges that many people aren’t all that interested in alternative investments. But HUB says private assets probably make sense for some 401(k) savers. It often raises the idea with its clients — mostly small and midsize retirement plans.

One of the old investment sayings from my long-ago youth was “Stocks are not bought but sold” as in brokers and the financial press had to whip up appetite for them. So it is not hard to think that persistent marketing will similarly eat away at well-warranted lack of enthusiasm for private equity products among not-so-dull normal retail investors.

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¹ These limits are justified on paternalistic grounds: 401(k) investors are supposed to take the long view and not behave like traders.