President Trump is considering whether to encourage retirement funds to invest in private equity, a financial sector that’s hungry for capital after shrinking last year for the first time in decades.
Trump is mulling an executive order that would instruct the Securities and Exchange Commission and Labor Department to guide directors of 401(k) and individual retirement account plans to make investments in private equity funds, The Wall Street Journal reported earlier this month.
Defined-contribution retirement plans usually invest in publicly traded stocks and bonds, which are typically regarded as safer financial assets. The customers of private equity firms, on the other hand, are usually big institutional investors like defined-benefit pension plans, along with super wealthy individuals.
By knocking down the wall between them, Trump would be opening up retirement plans to riskier investments while giving private equity a much-needed capital infusion.
While returns on private equity are often higher than those on public equity, they’re usually riskier. That’s because they’re less liquid, meaning it’s harder for an investor to get their money back once they’ve put it in.
The money that firms use to conduct transactions is also often borrowed in order to take advantage of differences in interest rates. Private equity firms were also known as leveraged buyout firms before they were rebranded in the 1990s after some notable failures and media scrutiny.
Investors are eager to get access to the funds, despite the risks.
“We’re going to need better ways to boost portfolios,” BlackRock CEO Larry Fink wrote in his annual letter this year. “Private assets like real estate and infrastructure can lift returns and protect investors during market downturns. Pension funds have invested in these assets for decades, but 401(k)s haven’t. It’s one reason why pensions typically outperform 401(k)s by about 0.5% each year.”
Axel Merk, president of Merk Investments, told The Hill that investors should be able to have as many choices as possible but cautioned against the regulatory and political “minefield” that such a new arrangement could present to managers of retirement funds.
“It’s very difficult for trustees to direct money to somewhat riskier investments. If there were to be broader access provided, it’s something of a political minefield for those that design 401(k)s,” he said.
Investment returns for private companies and assets are harder to track than those for public companies, which happen on open securities markets. However, there are clear signs that the industry as a whole has been ailing in recent years.
Assets managed by buyout firms shrunk by 2 percent from 2023 to 2024 to mark the first contraction in the sector in decades, the Financial Times reported earlier this year, citing research from consulting firm Bain & Company.
Capital investments in the industry lagged throughout 2024, the firm’s research found.
There are also numerous reports that private equity has taken in much more money than it has paid out in recent years — as much as $1.6 trillion — leading to concerns that the sector is fundamentally overvalued.
By opening up private investments to retirement funds, the fear is that institutional investors and rich people will be able to exit the overvalued market just as less savvy investors are encouraged to move into it.
Defined-contribution retirement funds got a huge boost from Congress in 2022 in the form of the SECURE 2.0 retirement law that increased “catch-up” contributions for older Americans to the greater of $11,250 or 150 percent of the previous limit. Americans held $12.2 trillion in all contribution-based retirement plans in March, out of which $8.7 trillion was in 401(k)s, according to the Investment Company Institute.
Rollovers in the sector are also down, as more investors are pulling their money out rather than putting it back toward eventual initial public offerings (IPO). Pullouts are up to between 85 and 92 percent of investors versus 75 to 80 percent last year, the Financial Times reported this week, citing data from investment bank Houlihan Lokey.
“We’ve had fewer IPOs,” Merk said. “A lot of companies are not going public anymore because they’ve been able to access the private markets.”
Trump’s deregulatory agenda, which stands in stark contrast with the atypically robust antitrust enforcement undertaken by the Biden administration’s Justice Department and Federal Trade Commission, could give the sector a boost, but it hasn’t showed up in force yet.
“The industry is certainly anxious to make deals, but the year’s early slowdown in M&A activity globally suggests that the dreaded u-word (uncertainty) continues to keep markets on edge,” Hugh MacArthur, a Bain partner, wrote in March.
Private equity has long been able to secure wins for itself in Congress and the executive branch.
The most famous example is the widely criticized carried interest tax loophole, valued at around $1 trillion, which allows fund managers to treat their income as capital gains for tax purposes, giving them a lower rate.
Trump recently floated getting rid of it for his tax bill, though he eventually left it in place. Democrats made a similar attempt in 2022 in the Inflation Reduction Act before it was killed by then-Sen. Kyrsten Sinema (I-Ariz.). Former President Obama also tried to do away with it before letting it go.
Private equity also got a major boost from the Trump tax cuts, which included a new accounting standard for interest deductibility that is especially valuable to businesses paying for investments with borrowed money.
The law reinstituted wear-and-tear expenses as being tax-deductible, increasing the amount of the write-off. The provision is worth nearly $40 billion in lost revenue, according to an estimate from the Joint Committee on Taxation.
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