Under current U.S. regulations, private equity funds can only be sold to accredited investors, defined as individuals with a net worth of more than $1 million or annual earnings of more than $200,000, or institutions with more than $5 million in assets. Some 401(k) plans might qualify, although employers must ensure the investments offered have fees, risk, transparency and liquidity that are appropriate for plan participants.
Traditional pension funds are among the biggest investors in private equity, although they have become more selective after losses during the 2007-2009 financial crisis. Private equity funds raised $312 billion globally last year, less than half the $669 billion gathered in 2007, according to data from London-based research firm Preqin Ltd. Fundraising closed after an average of 17 months in 2012, compared with 12 months in 2007, according to Preqin.
With traditional investors reluctant to commit new money, firms are getting more serious about accessing retirement plans, which have been a reliable source of growth for traditional asset managers such as Boston-based Fidelity Investments.
Assets in defined contribution plans will grow about 6% a year to $5.03 trillion by 2016, surpassing the $4.9 trillion projected for public pension funds and widening the gap over private pension assets, according to Boston-based research firm Cerulli Associates.
KKR last year started two debt funds for individual investors. The Alternative High Yield Fund, which became available in November, is an open-end fund with a $2,500 minimum investment and the option to withdraw money daily. The Alternative Corporate Opportunities Fund is an unlisted closed-end fund with a minimum investment of $25,000 and quarterly liquidity. The funds, which will invest in assets such as high-yield bonds and bank loans, are the first pools managed by KKR that are structured like mutual funds.
KKR is close to being able to add the high-yield fund to its own 401(k) plan through Fidelity, according to a person familiar with KKR's plans. KKR views that as a step toward offering the investments to other Fidelity 401(k) plan clients, said the person, who asked not to be identified because the information isn't public. Nicole Goodnow, a spokeswoman for Fidelity, declined to comment. Fidelity is the nation's largest provider to 401(k)s.
“We're seeing a great level of interest by investment managers who have never worked in the defined contribution space to find a way for their products to fit,” said Lori Lucas, defined contribution practice leader at San Francisco-based consultant Callan Associates Inc.
Blackstone, the world's largest manager of alternative assets such as private equity, real estate and hedge funds, is seeking to develop products that would be suitable for individual investors, according to a separate person who asked not to be named because decisions on such products haven't been made yet.
Christine Anderson, a spokeswoman for New York-based Blackstone, declined to comment on the plans.
The firm last year partnered with Boston-based State Street Corp. to create an exchange-traded fund for speculative-grade loans. The fund, SPDR Blackstone/GSO Senior Loan ETF, started trading April 4 under the ticker SRLN.
Carlyle is raising a fund with New York-based investment firm Central Park Group LLC that will accept as little as $50,000 from individual investors, according to a January regulatory filing. Central Park Group will allocate money from the pool, called CPG Carlyle Private Equity Fund, to a variety of Carlyle-managed funds, with the aim of putting as much as 80% of the investors' capital in buyouts.
The minimum commitment to Carlyle's funds is typically $5 million to $20 million.
Carlyle, which is based in Washington and oversees $170 billion, expects its investment products may eventually reach defined contribution plans, said a person with knowledge of the firm's strategy.
Traditional defined benefit plans have benefited from the ability to access a wider array of asset classes, said Alan Glickstein, senior retirement consultant at Towers Watson & Co., New York. DB plans outperformed defined contribution accounts by an annual average of 93 basis points from 1995 through 2008 after adjusting for fees, according to Towers Watson's latest data.
Private equity funds returned an average of 14% from 2002 through 2012, according to Seattle-based researcher PitchBook Data Inc. U.S. stock funds gained an annualized 8.4% and bond funds rose 5% a year, according to Morningstar.
The likely entry point for private equity firms seeking access to DC plans are target-date funds, the most common default option for employees joining the plans, said Callan's Ms. Lucas.