Securities and Exchange Commission Chairman Paul Atkins asked his agency this month to review decades-old rules that restrict who can invest in private markets. The request underscores how the wealth management industry is in the midst of a transformation that is resulting in private investments and alternatives becoming more accessible to everyday retail investors across the U.S.
The rules Atkins is seeking to revise were established 23 years ago for private funds, and require investments of at least $25,000 and restrict sales to those who meet accredited investor standards. The rules were established to ensure less experienced and financially savvy investors weren’t taking undue risk while investing in private markets, but the chairman says it’s time to rethink that as the private markets are booming: Over the past decade, they’ve grown from $11.6 trillion to $30.8 trillion, Atkins said. Other reports have said the Trump administration is considering an executive order to bring private equity to 401(k)s, which could spur faster adoption.
“Allowing this option could increase investment opportunities for retail investors seeking to diversify their investment allocation in line with their investment time horizon and risk tolerance,” Atkins said at an annual regulatory conference in May.
It’s safe to say Wall Street is on board. Firms, including some of the U.S.’s largest banks and asset managers, have been clamoring to get a piece of the $12.5 trillion 401(k) market. There’s been an influx of mass-market vehicles promising alternatives exposure and a range of public-private partnerships being introduced in recent months. Just one example: Empower, which oversees $1.8 trillion in assets for 19 million retail investors, recently announced it is partnering with firms like Apollo Global Management to allow investments in private credit, private equity, and real estate in some of the retirement accounts it administers.
Outside of 401(k)s, Percent, a private credit platform, has seen private credit investments in IRAs grow by more than 165% over the past two years, the company says. And State Street, the asset manager, plans to debut a second exchange-traded fund that tracks private debt, also in collaboration with Apollo.
Wall Street positions investments in alternatives and private markets as an opportunity: Retail investors, firms say, should have the ability to access the potentially higher returns that private credit, private equity, real estate, and venture capital can yield relative to public equities and other more mainstream asset classes. The financial firms, of course, get potentially trillions more dollars to manage and all the fees that entails.
Private markets also give investors access to companies that aren’t publicly traded, which is becoming increasingly attractive as businesses stay private longer, potentially creating vast wealth for early-stage stakeholders. The demand is there, and investors want more options, the firms say. Why, they ask shouldn’t Main Street investors be able to tap into the investments that billionaires, institutions, pensions, and other wealthy players benefit from?
But these new vehicles raise a number of questions, says Martin Gross, founder and president of Sandalwood Securities. The biggest being: How can investors tell if the new offerings are high-enough quality, especially when private markets don’t have easily accessible valuations or data transparency like public markets do?
“The more portfolio tools, the better, but once you’re inside that door, you’ve got to make sure that what you’re being offered makes sense,” says Gross. “You have to understand what a good fund is from a bad fund.”
There’s a learning curve. While retirement savers might have a handle on the public companies they are currently invested in, adding privates and other alts adds complexity. Privates are generally classified as illiquid assets, meaning investors cannot quickly or easily sell their holdings, and many funds require investors to commit their dollars for five to 10 years or longer. As with all investing, there is no guarantee of high returns, and fees tend to be higher. And if something goes wrong, it isn’t as easy to exit as a public investment.
“Even seasoned institutional investors struggle to get the clear valuations, data, and visibility they need to make smart decisions,” says Simon Tang, U.S. director at private markets AI firm, Accelex. “For retail investors adding to their retirement pots, this lack of clarity could mean taking on risks without having a full picture of the investment.”
That said, private markets do offer opportunities. In a time when just a handful of companies dominate public index funds and the number of public companies overall is shrinking, privates can give more diversification to portfolios, which helps in times of volatility. And given that many retirement savers have, in theory, long investment time horizons, privates can make sense.
Different assets work for different time frames, says Gross. Private equity and venture capital are better for those with more time, while real estate can work shorter term. “It’s just a case by case analysis,” he says.
Public and private markets blur
To appeal to retail investors, firms that “stand at opposite ends of the asset-management spectrum” are collaborating on new public-private markets, blurring the lines between the two, according to Morningstar. In addition to State Street and Apollo’s ETF, Vanguard and Blackstone, for example, recently announced an interval fund in partnership with Wellington, “signaling how mainstream this is becoming.” While Vanguard is known for its low-cost passive offerings primarily in the public markets, Blackstone is a major private markets and alternatives player.
As Morningstar notes in its analysis of the growing public-private partnerships, whether these strategies will work out for retail investors remains to be seen. “Despite the brand-name pedigree of the asset managers involved, most of these strategies are untested,” Morningstar’s Jason Kephart and Bridget B. Hughes write. “What is known is that private assets bring added complexity, reduced liquidity, and higher fees. Investors must weigh whether the potential benefits of private-market exposure are enough to clear those hurdles.”
While 401(k) plan sponsors have been allowed to include private investments in a multi-asset fund, like a target-date, since 2020, there is more traction now because “there seems to be an expectation of less regulatory scrutiny from the SEC going forward,” Kephart said.
When it comes to the average American’s nest egg, investing experts say to tread carefully while these new investment vehicles are being established.
“If the private equity industry is set on expanding to access retail investors’ hard-earned cash, it must take strong measures to improve clarity over private assets’ valuations and performance to ensure investors can make informed decisions and have full visibility of where their retirement money is going,” says Tang.
