Private equity funds, by their very nature, work quietly, privately, in the background of business investments. With limited reporting requirements and decisions in the hands of just a few, private equity firms like the one run by Michael Canzian stay under the radar. However, in the last two years, private equity is going public. Read on to learn about three of the trends in private equity.
Private Equity IPOs
Private equity firms, PEs, are known for paying returns higher than can be achieved through investing in the stock market. Their stock-in-trade is leveraged buyouts and venture capital investments. When they take over companies, private equity firms are known for maximizing profit through guidance and investments, then selling the company on within four to seven years. PEs have minimum investor buy-ins, starting at a quarter of a million dollars and quickly heading into the millions.
This high-end buy-in may be why a handful of PEs have suddenly decided to go public. An initial public offering, IPO, is one way to quickly bring in significant cash flow and liquidity to a traditionally illiquid investment. While IPOs have paid off for retiring PE managers looking to cash out and retire, they, so far, have not been a good investment for stock traders, with most trading well below their IPO price and underperforming every other stock market sector. Part of that may be the mistrust around such a private industry. Only time will tell if going public is the future of private equity.
Investments Directly in Private Equity
One way that private equity firms have started generating cash without opening themselves up to public ownership and all the reporting requirements that come with the SEC is by taking investments from 401(k)s. At the end of 2020, the Department of Labor paved the way for these retirement plans to invest in private equity through guidance issued by Eugene Scalia, Labor Secretary. Prior to this decision, pension plans were already investing in the private equity space but it is a brand new option for 401(k)s.
Individual investors can’t request to invest in private equity individually; however, their asset allocation managers may offer private equity funds as an investment option. Brokerage houses like Vanguard and Charles Schwab are already dabbling in offerings to their clients. These options may not become very popular because of the next trend.
Retirement Brokerages Held Responsible for Risky Investments
One reason that retirement investments in private equity may never grow to a significant portion of the market is the 2017 ruling in Tibble vs. Edison International. The case, which went to the Supreme Court and back to district court, found that the financial advisors breached their fiduciary responsibility to their clients by investing in high-fee funds instead of comparable, low-cost options. With the fees associated with most private equity investments, mutual fund managers may be looking elsewhere for high payouts.
While the current trends in private equity firms are moving toward the public, it looks like the public may not be interested in engaging.