Tuesday, October 22, 2013

PEU Courting of Baby Boomers

Private equity underwriters (PEU's) may soon be ready to tap money in individual Baby Boomer retirement accounts.

History shows PEU's selling a twofold cause for their stellar returns.  One, they were not publicly held, thus they could be more patient in growing their equity stakes in affiliates.  In the last few years a spate of PEU's went public, discrediting this critical success factor. 

Two, they invested big money from a few long term "patient" investors, pension plans, extremely wealthy investors and sovereign wealth funds.  Now PEU's have their eye on the mass of less wealthy investors saving for retirement.  Forbes reported:

"The looming pension fund squeeze explains an increasingly urgent search by major private equity groups to find a way to tap retail money: in particular 401 (k) retirement accounts. These individually managed accounts are the fastest growing form of defined contribution plans – where the sum invested is fixed.

But selling private equity funds to individuals is going to be tough. Individuals are not comfortable losing discretionary control over their money for a decade or longer. Creating feeder funds for the vast majority of individual investors, who don’t meet accredited investor status, will also add difficult-to-digest expenses in an asset class where fund managers already, on average, impose a 2 percent annual management fee, and typically take 20 percent of profits above an 8 percent annual return hurdle rate."
The Forbes columnist suggested PEU's stick to their knitting and chase new wealth around the globe, whether that be wealthy individuals or sovereign wealth funds.  

If anyone has the resources and time to successfully invest in private equity – arguably the most complex asset class that exists – it’s professional investors.
Complexity and greed, two PEU memes, seem to be spreading wildly throughout the globe.  Can their volcano like growth be reigned in or will they grow so fast they collapse back onto themselves?

Those who believe in the PEU model can already buy stock in Blackstone, The Carlyle Group, KKR and Apollo Global Management.   If that isn't the PEU bridge to riches why would one believe in their next retail offering?