You know that private equity is the next big thing coming for you, and that’s because big investors like pensions and endowments are ready to offload the illiquid and opaque investments onto unsuspecting 401(k) investors.
New information about the nature of private equity investments has come from an unexpected place. As part of her investigation into Harvard University, Congresswoman Elise Stefanik has written a letter to SEC Chairman Paul Atkins suggesting that the “real, realizable value of these assets [Harvard endowment’s private equity assets] is likely far below stated values.” The letter reads:
At The Wall Street Journal, Jonathan Weil explains why the letter is a bazooka shot “at the entire private-equity industry.” He writes:
So if the SEC investigates Harvard over the valuations, it should also investigate the private-equity firms that provide them, if not the whole private-equity sector. This could be helpful. With a full-court press under way in Washington to get private-market funds, like private equity, into Americans’ 401(k) retirement plans, it’s more urgent than ever that alternative investments reflect market realities, not wishful thinking.
The problem of stale or fishy private-equity valuations is well-known. The funds are supposed to mark their investments at fair market value. But the holdings tend to be illiquid and hard to value. This makes the fair-value measurements difficult for outsiders to challenge, and easier for managers to hold still.
The real problem arises when investors unexpectedly need cash and can’t sell the holdings at their stated values. On the secondary market, private-equity stakes usually sell at a discount to their official values. Last year, the average discount was 11%, according to Jefferies. It was 25% for stakes in venture-capital funds, a form of private equity.
Action Line: The danger, as Your Survival Guy has explained, is that big money managers like Vanguard, BlackRock, and others want to put these private equity investments in your 401(k). When you want to talk about a portfolio of individual securities managed by a fiduciary who is legally bound to put your interests first, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
Originally posted on Your Survival Guy.
