I recently read an article in the Financial Times explaining that LPs are becoming more selective about where they place their investments, citing the ever popular point of too many buyout funds chasing too few deals (among other reasons) – Link to FT Article.
To most, this is not news and has been a great subject of debate for a few years now since the crash in 2008. This morning, PeHub posted a link to a DealBook conference where Steve Schwarzman and David Rubenstein commented that PE could be a bright spot of investing for LPs looking to deliver on their promises of interest rate returns which have recently been unattainable in other markets. Link to PeHub Article
“States have [target return rates] of 7.75 or 8 percent — and they’ve almost all been singularly unsuccessful doing that [rate of return] over the last five years, if not a good deal longer,” Schwarzman said. “So they have very few ways to solve that problem. One way to do it is to invest in higher-return products.”
What I found most interesting about the commentary from Schwarzman and Rubenstein though has to do with the potential for the SEC to open up private equity investing to the little guy:
Carlyle’s Rubenstein said that it’s not just pension funds that are eager to catch up. Individual investors, he said, are also eager to tap into alternatives such as private equity. “Why can’t not-so-wealthy investors get access to these vehicles?” he asked. “They need the higher returns even more than the wealthy people.”
Rubenstein predicted that soon, perhaps within the next five years, the rules prohibiting non-accredited investors from investing in assets like private equity will be relaxed. “Eventually … non-accredited investors will be coming into private equity to a certain extent through their 401(k) programs because eventually there will be pressure on the SEC in Washington.”
The reason investors of moderate means are interested in tapping into alternative investments, said Rubenstein, is that “people who have their money in bank accounts are getting zero interest.” Individual investors, whether extremely wealthy or moderately so, is “where I see the biggest increase in private equity investments … right now.”
What do you guys think? Would the government ever allow such rules to pass that Joe the Plumber could become an LP in Blackstone’s next fund? Is this even a good idea? I can tell you that with so much uncertainty from individual investors about where to sock away any free cash they have, this could either be a giant mistake or a saving grace.
Accredited investor rules are stupid. Judging whether someone is competent enough to understand the risk associated with an investment has very little to do with their income or net worth. That said, normal individuals won't likely be able to invest directly into PE/HF because most have minimum investment requirements that can range into the millions of dollars.
Normal people pooled together might get access through 401ks as referenced above; this is really only fair because government pensions are allowed to invest so why can't I get access to similar returns through my retirement plan, instead of a bunch of crappy mutual funds?
Also, I agree the current rules are unfair to the average investor and that high net worth and financial sophistication do not go hand in hand.
Good point on the investor # limits. That is another dumb rule, particularly given that it is easily skirted through a fund of funds structure, etc.
Man, I see some duuuumb mo-fos on American Greed getting scammed by their buddies. There are plenty of nouveau riche out there with no fucking sense.
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All good points made above - I can just imagine the bedlam resulting from individual investors rushing to invest in these funds without the foggiest idea of what PE/hedge funds/VCs really are (admittedly no different than someone opening up an eTrades account and invest in stocks by themselves if they don't have an understanding of the stock markets).
I also think it could create a nightmare scenario for a number of situations, including waterfall payouts on realized profitable exits. While I think it could be really interesting to have the every day investor have access to these investment firms as an asset class, I'm just pessimistic about this becoming a reality anytime soon.
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