New Labor Department Guidelines Open 401Ks to Private Equity

By Generational Equity


A few weeks ago the U.S. Department of Labor issued new guidelines allowing 401K plans to invest in private equity funds. For decades pension funds have been allowed to invest in Private Equity funds (PE) and in doing so have generated significant returns for their members. Now these returns will also be available to 401K plan investors.

Although controversial to some, there is one key reason why this move was made: PE funds typically generate significant returns to their investors, often well above those available to 401K plans via the stock market.

This can be seen in the latest data from the American Investment Council research:

As you can see, the Cambridge Associates’ 10-year analysis shows that the PE Buyout Fund return was 16.8% vs. 13.5% for the S&P (excluding dividends). As you know, given the volume of capital we are talking about, a return of 16.8% over a 10-year period is significant indeed. If managed properly, this will generate a significant return to many 401K plans, providing much-needed funds for retirement for millions of Americans.

But besides the potential positive impact on your 401K, what does this news mean to owners of privately held companies?

Well in short, it is great news!

Analysts we track estimate that PE firms have over $2 trillion in committed capital to invest. Now they will be able to add to that funds from 401K accounts. The good news for business owners is that prior to the current pandemic, there was too much capital and not enough companies to invest in. Now, with these additional funds, PE firms will be even more motivated to seek out investment opportunities.

So if you own a privately held company, and even if your business has been disrupted the last few months by economic shutdowns, be prepared during the recovery over the next several months to be approached by aggressive PE buyers. They simply will have even more capital to spend and will be digging for companies to invest in.

You need to begin preparing now to be “buyer ready” when the economy fully opens by late summer. Those who are prepared will reap the benefits, while those who wait will not. As we have said many times, we have never met a business owner who regretted starting his/her exit planning too early!

So given the addition of 401K funding to PE firms, now is the time to act in order to be ready to take advantage of these additional funds.

First step, if you haven’t done so, is to attend a Generational Equity exit planning meeting in your area. Fully complimentary and highly educational, attending will allow you to explore your options and begin developing growth plans to allow you to benefit from the upcoming recovery. To learn more about our services and how they can help you move beyond our current economic situation, please use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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