How Private Equity Firms Are Targeting Your 401(k) - And Why You Should Fight Back  | | Shah Gilani
Chief Investment Strategist | You've probably seen the headlines... Wall Street's elite private equity firms - those slick suits buying billion-dollar businesses with other people's money - now claim you, the average investor, deserve a seat at the table. They say private equity is the secret sauce behind generational wealth and institutional success. Here's what they don't tell you... For everyday investors - retirees, 401(k) holders, or even high-net-worth individuals who don't sit on pension boards - private equity is often a liquidity trap, fee machine, and high-risk fantasy that can gut your financial security when you need it most. Let me explain what's going on and why you should steer clear unless you can afford to lose access to your money for a decade or longer... Sometimes Great for the Few, Always Risky for the Many At its core, private equity is an investing style of hedge funds like Blackstone, KKR & Co., TPG, and The Carlyle Group. Acting as general partners (GPs), they set up investment funds and raise massive amounts of money from pension plans, sovereign wealth funds, university endowments, and the ultra-wealthy. These funds, typically structured as limited partnerships, buy out private companies, take public companies private, and engineer profits through restructuring, financial leverage, and cost-cutting. If they hit it right, the rewards can be eye-popping. If they don't? Good luck finding out - private equity's disclosures are less transparent than a bank vault at midnight. But here's the catch: PE funds are built for institutions, not individuals. They come with seven- to 10-year lockups, meaning you're stuck until the fund exits its investments - often years after your capital is deployed. During that time, you'll pay some of the highest fees in the investing world. "Two and 20" and Then Some The standard PE fund charges a 2% annual management fee on committed capital and a 20% performance fee (known as "carried interest") on profits above a threshold return - usually around 8%. But that's just the tip of the iceberg. Many funds also include "pass-through fees" such as... - Monitoring fees
- Transaction fees
- Break-up fees
- Fund expenses
Even if performance underwhelms - and trust me, many funds underperform public markets after fees - the GPs still get paid handsomely. In fact, PE managers often get richer even when their limited partners don't. And don't think you can "just get out." If you face a personal emergency - health crisis, job loss, or need to tap retirement savings - you can't simply sell your stake like a mutual fund or ETF. Private equity is illiquid by design. Now here's where it gets especially dangerous... Retirees Beware PE firms are pushing hard to break into 401(k) plans and retirement accounts. Why? Because that's where the money is. Over $12 trillion sits in 401(k)s - and private equity wants its cut. In 2020, the Department of Labor opened the door to limited private equity access in professionally managed retirement accounts. But retirement plans have no business in illiquid, opaque, high-fee assets that can't be exited easily when life throws a curveball. Imagine you're 62 and thinking of retiring, but your 401(k) plan holds 15% in PE. You can't access that capital. You can't rebalance out of it. And if you need to start required minimum distributions (RMDs)? Good luck. But it gets worse... Wall Street's Trojan Horse To get around these lockup issues, PE firms have been pushing publicly traded ETFs that give exposure to PE-backed companies or attempt to hold private assets inside a liquid wrapper. It sounds like innovation - but it smells like desperation. Here are some private equity-inspired ETFs, their strategies, and expense ratios: - Invesco Global Listed Private Equity (PSP) holds listed companies that invest in PE; its expense ratio is 1.79%.
- ProShares Global Listed Private Equity ETF (PEX) invests in financial instruments that track the performance of indexes designed to measure PE companies' performance; its expense ratio is 2.99%.
- VanEck BDC Income ETF (BIZD) invests in securities and instruments that track BDCs - business development companies that invest in private equity portfolio companies; its expense ratio is 12.86% (that's not a typo).
These funds may be "liquid" in terms of trading, but don't be fooled - they still come with steep fees, thin disclosures, and volatile performance tied to highly leveraged investments. And if the underlying assets are private, how do you know what they're really worth? You don't. You're at the mercy of what's known as mark-to-model accounting, not actual market prices. An Era of Financial Engineering We're in an era of financial engineering and yield hunting. Interest rates have surged, public markets are volatile, and retail investors are being enticed into riskier waters under the guise of exclusivity. Private equity isn't inherently evil - it's just not for most people. If you're planning for retirement, living paycheck to paycheck, or need access to your money for emergencies, then tying up capital for 10 years in something you can't sell, can't value accurately, and can't afford to ride through a recession borders on financial malpractice. Private equity has its place - for institutions with long time horizons, deep due-diligence teams, and access to top-tier GPs. For the rest of us? It's a minefield of fees, opacity, and illiquidity. Wall Street is always dreaming up new ways to extract wealth from retail investors, and the push to shoehorn private equity into retirement portfolios or ETFs is just the latest example. Don't take the bait. Stick with transparent, liquid, diversified investments that serve your time horizon - not the one that pays a PE firm for a decade while you wait for a payout that may never come. Don't listen to anyone who says otherwise. Next week... I'm going to talk about PE's sister, private credit. It's the second head of this two-headed Wall Street monster. Stay tuned, Shah Want more content like this? | | | | | | 
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