By Ian Salisbury

America's retirement accounts are a $12 trillion pie. Private equity wants its slice.

Seeking new investment amid a global slowdown in fund-raising, the industry is looking beyond its traditional world of wealthy individuals and institutional funds. The firms see a vast pool of potential fund investors in 401(k)s and other retirement accounts owned by 70 million Americans through their workplaces.

Whether investors would fare better with some private equity in their portfolio -- versus a traditional stock and bond mix -- remains debatable, and the industry faces steep roadblocks. But firms are now launching funds and similar investment products for 401(k)s. And they're betting on more-accommodative rules or a pass from the Trump administration to help pave the way.

"There is no shortage of opportunities in retirement, and we truly have not even gotten started," said Apollo Global Management CEO Mark Rowan at the company's investor day last September.

Apollo, which manages more than $750 billion, is getting some of its investments into collective investments trusts, or CITs, which are alternatives to mutual funds for 401(k)s. One such CIT is called the Alta Privately Managed Alts Fund, launched last year with some Apollo assets. Another, the Apollo Aligned Alternatives CIT, also includes private investments, according to LeafHouse, a Texas firm overseeing it.

KKR, managing $638 billion in assets, is making inroads. The firm last October partnered with Capital Group to launch interval funds with private investments in 2025. These funds have restrictions on when you can sell -- hence the name "interval" -- and they're typically marketed to wealthy investors. But Capital Group could get them into 401(k) plans, building on its foothold in the space with its American Funds. Capital Group declined to comment on its plans.

The fund industry will still need regulatory and legal cover. The first Trump administration gave a green light for target-date funds in 401(k)s to invest 5% to 10% of assets in private equity, credit, and other alternatives. But alternatives remain largely on the outskirts of most plans, partly because companies and trustees that oversee retirement plans worry about being sued for breaches of fiduciary duty if they delve much beyond stocks and bonds.

"Plan sponsors are notoriously adverse to risk and cost," says Fred Reish, a prominent Employee Retirement Income Security Act, or Erisa, attorney. Companies are working out ways to create private investment funds with daily liquidity, he points out, and if a private-equity investment is be seen as riskier than a "vanilla" mutual fund or is more expensive, it will face headwinds.

Some investment firms say the doors are starting to crack open. "We're seeing a ton of momentum," says Dan Cahill, head of U.S. defined contribution at Partners Group Holding, a $152 billion private-equity firm.

The firm has a beachhead in 401(k) through its Partners Group Defined Contribution Fund, an investment trust with about 70% of its assets in private markets, 25% in listed private equity, and 5% in cash. Partners is now teaming up with BlackRock to launch portfolios that include private equity for wealthy investors. "We are talking to every fund manager out there, all of whom have interest in pursuing a product that includes private markets," Cahill says.

Private equity involves a different set of risks than do stocks and bonds. For one, it's an opaque, illiquid world. Private-equity firms frequently invest in companies that are too small or risky to issue publicly traded shares. Those businesses don't necessarily issue quarterly earnings reports, and their values can be murky. Similar dynamics apply to private credit, real estate, and other private assets, often referred to under the broad "private equity" umbrella.

Moreover, private funds typically lock up investors' money for years, only periodically valuing their holdings or giving investors a chance to cash out. That has made them ill-suited for retail investors, relative to mutual funds and exchange-traded funds, which offer daily pricing and liquidity.

Given the illiquid nature of private equity, it's unlikely you'd see a stand-alone private-equity fund on your 401(k) menu; the investments are likely to be mingled in a target-date fund or CIT.

Whether you should own private equity is another matter. Institutional pension funds and university endowments have long held private equity, credit, and other illiquid assets -- betting they will offer uncorrelated and superior returns to stocks and bonds.

Private-equity firms say their track record speaks for itself. Apollo, for one, says its flagship private-equity funds have returned an annualized 39% on a gross basis and 24% net of fees since inception. Even after a steep haircut for fees, that would trounce the roughly 10% average annual return in publicly listed equities. According to some private-equity industry research, if 401(k) savers shifted 10% of their stock and bondholdings to private equity and real estate, they could boost retirement incomes by $200 a month.

But studies from Morningstar and the Center for Retirement Research at Boston College have found mixed to negative results. A 2024 Boston College study found that long-term returns for pension funds, which own alternatives, was almost identical to a simple 60/40 portfolio of stocks and bonds.

"I think it introduces unnecessary risk," says Alicia Munnell, an economist and founder of the Center for Retirement Research. "People should not invest in stuff they don't understand. And I think private equity is pretty hard to understand."

Investors face similar challenges to picking a winning mutual fund. Buying or selling at the wrong time, along with high fees, can sharply erode performance, says Hal Ratner, head of research at Morningstar Investment Management.

Attractive industry returns may also be skewed by a few standout funds. One private-equity benchmark beat the S&P 500 index in 22 out of 23 years from 1998 to 2020, according to Morningstar. But that was driven by a few stellar funds, much like tech stocks such as Nvidia have driven stock market returns. "There is a lot of focus on superb private-equity funds, but they are in the minority," said study co-author Lia Mitchell.

Another hurdle today is steep asset prices, pushing deal multiples close to record levels in North America and Europe, according to a recent Bain & Co. report. Deal multiples are averaging 12 times enterprise value, relative to operating earnings, up from five to 10 times in the early 2000s. Higher prices could mean less upside when firms try to unload their assets, denting total returns.

Then there are the fees. It's unclear what 401(k) investors would pay, but a look at interval funds isn't encouraging. The average interval fund has an expense ratio of 2.5%, according to Morningstar. That's almost 10 times higher than the 0.3% average for target-date funds holding mainly stocks and bonds.

Even if investors were willing to pay up, an increase in fees could elicit class-action lawsuits. A spate of such suits -- targeting high-profile companies like Caterpillar and Lockheed Martin -- has helped wring excess fees from 401(k)s but also put a chill in plans offering higher-fee funds.

Some lawyers are ready to pounce. "I believe in my heart of hearts private equity is inappropriate" for 401(k) investors, said retirement class-action lawyer Paul Secunda. "I will sue in a second."

There's another way to put private equity in your portfolio: Open your retirement plan's brokerage window, if one is available, and buy stock of KKR, Apollo, or another private-equity firm. The industry's returns have been solid, and firms are raising billions for new funds that will generate fees for years. That may reward investors in their own equity, without having to go private.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 07, 2025 02:00 ET (07:00 GMT)

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