For more than a decade, we have publicized that private equity is not delivering on its promise of delivering superior performance to investors. The industry appears to be poised to raid yet another piggy bank: 401(k) funds, even as returns have slumped, former loyalists of the biggies are looking elsewhere for better returns, and big fund managers are resorting to risky tactics to look good.
And that’s even before we get to the social costs of that plunder, as demonstrated by both the level of bankruptcy left behind by private equity kingpins and the malfeasance in private equity-infested industries such as health care (the explosion in claims is just one example among countless others). And, as we will soon demonstrate, private equity is now visibly underperforming to the extent that new allocations to private equity funds are failing. The industry has been trying to move into retail for years, despite the fact that it creates an unsustainable and performance-depressing layer of additional fees and costs on an already unreasonably expensive investment strategy. As long as private equity-owned companies actually outperform, fund managers are siphoning the benefits. Therefore, better marks are needed and conquest of the 401(k) industry becomes a new route.
Let’s briefly summarize the story of private equity’s exaggerated performance. Private equity promotes false valuation methods accepted by ignorant or complicit investors. One is the use of internal rate of return. In MBA finance courses, results are accused of being inaccurate and regularly exaggerated, especially when returns look favorable or can be made to look favorable early in the investment. Furthermore, private equity is the only investment strategy in the institutional space where fund managers set their own valuations for their holdings and do not have independent experts to provide those valuations. Private equity, in particular, is perceived to underestimate how much the value of the companies it invests in will fall in bear markets. This practice is so well known that in 2015, at a private equity conference hosted by the giant fund CalPERS, pension fund investors not only acknowledged it, but also portrayed its drawbacks as an advantage. This “earnings smoothing” reduced the amount of bad press investors received in crappy markets by making things look better than they really were.
But even with the acceptance of risky valuation techniques, for two decades starting in the mid-2000s, private equity did not generate enough returns to adequately reward investors for the additional risks and costs. Most finance professors receive large consulting fees from private equity firms, publish obligatory industry-pleasing papers, and give presentations with all the right caveats, yet they still have an overall rosy and supportive tone. But thanks to the glory days of the 1995-1999 vintage years, private equity investors typically reported strong performance over the next five to 10 years. This is due to the fact that the private equity industry shrank significantly after the wave of LBO bankruptcies in the late 1980s, as well as the tailwinds of good economic performance during the Clinton era, which led to better stock selection. Too much money soon began chasing what became too little trading. The Oxford Business School professor argued that since 2006, private equity no longer outperformed equities, even though private equity is typically benchmarked at a premium of 300 basis points (3%) to public equities, if necessary, due to its higher risk (leverage and illiquidity). Conspiracy continued, including changing to a more forgiving stock index for comparison purposes, for no good reason. Reduce private equity premium to 150 basis points.
But the faithful, especially teams at large funds specializing in private equity investing, kept pouring in more money. A quick look at the headlines in the Financial Times will give you an idea of what happened.
This Tweet provides a layman’s overview of recent strategies for hiding performance degradation. While this is a little inaccurate in some important respects (private equity limited partners offer equity rather than debt; private equity funds have no fixed term, investors expect to get all their money back in 10 years or so), it is otherwise sound.
Tiffany Cianci says, “There are more private equity firms in America than McDonald’s right now, and that should scare everyone.”
everyone should watch this video
They created a massive scam that destroyed everyone’s 401(k)
This is why life is so expensive pic.twitter.com/L61Tdad4yt
— Wall Street Apes (@WallStreetApes) February 14, 2026
The next planned target for private equity extraction is 401(k)s. Bloomberg has published a new in-depth article. To help you read these excerpts, I would like to highlight some issues. First, 401(k) plans are still not a huge deal to the end investor. Fees are opaque, which means they are expensive. There are also conditions that serve fund managers at the expense of customers, such as slow crediting of proceeds from the sale of one fund to purchases of another fund and restrictions on when and how often customers can switch funds. 1 If you have paid any attention to private equity operations in the health care sector, the major operators have been adept at finding the niches of monopoly and oligopoly. For example, they buy up all the dialysis centers in major metropolitan areas and jack up prices because dialysis patients don’t have to drive far. Get the regular treatment you need. Therefore, private equity is expected to similarly create price advantages from service providers to participants in the 401(k) industry, increasing expenses and thereby hurting investors’ net returns.
The second is to ensure that private equity funds add more private equity industry products to their 401(k) plan options. This will certainly lead to more money flowing into private equity and private credit. Many investors “diversify” by spreading their assets across all options, even though many of the funds have similar return profiles and do not perform true product diversification. Richard Ellis, one of the fathers of the quant industry, explained how even supposedly very sophisticated endowments can do this and undermine their bottom line – this is a pervasive fallacy.
When it comes to private equity in particular, the industry has succeeded in convincing almost all investment consultants that private equity is an asset class. That’s a magic word. Portfolio theory says you need to diversify across asset classes. This allows for efficient investment. You won’t necessarily make more money than by betting less, but you can expect to reduce your risk.
The small problem is that private equity is not the right asset class. One key requirement is that returns over time are significantly different from returns of other asset classes such as real estate or bonds. But private equity is just leveraged equity. The purported difference in return profiles is due solely to the fact that private equity funds report results late, typically one quarter after the end of the measurement period. Timed reports give you the idea of properly tracking public stocks and providing portfolio diversification.
To Bloomberg:
Private equity plays a big role in wealth advice firms
Acquisition Shop acquires approximately 1,000 companies related to high-net-worth individuals and retirement benefits in the United States
Source: Pitchbook
Note: This data includes private equity-backed transactions for high net worth and retirement advisory firms.
These days, private equity is making inroads into every corner of the vast 401(k) ecosystem that ordinary Americans expect from their golden years. Industry giants that want to sell their products to the investing public are hiring experts from traditional asset management firms to acquire branded mutual funds. They have crashed meetings, co-opted industry groups and pushed for friendly regulations, people familiar with the matter said. Small businesses have acquired hundreds of independent gatekeepers, including consultants, advisors, and third-party managers.
Interviews with dozens of people from across the industry, from private equity executives to individual advisors, demonstrate how broad and deep this movement is. Some purchasing shops make profits from handling retirement benefit plans and ancillary businesses. Some believe that luxury wealth management and its more lucrative fees are an attractive target as the wealthy get richer.
New doors are also opening for companies that do not acquire 401(k) companies themselves. Powerful companies like Apollo Global Management, Blackstone, KKR & Co, and Carlyle Group want to promote their rare investment brands to the masses, and the path is clear.
The private wealth industry has been lobbying governments for years to support the inclusion of alternative investments in defined contribution retirement plans. In August, President Donald Trump signed an order aimed at making it easier to access private equity, real estate, cryptocurrencies and other alternative assets in 401(k)s. Now, we can expect long-awaited guidance from the government someday.
In the short term, Main Street’s timing seems delicate. Pension funds and endowments that have long supported private equity are starting to withdraw. The returns don’t seem to be as good as they used to be.
Private equity funding is slowing down
Alternative asset management companies have difficulty raising funds
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Source: Pitchbook
Note: Funds raised in the US
The article points out that there is a disconnect (at least for now) between the ambitions of individual investors and the ambitions of the private equity industry.
The problem is that most 401(k) investors don’t seem to have any problem with the options they have. Only a handful of plans say they plan to add private assets to the menu. Many advisors say that the companies they work with are either not interested in this discussion or lack an understanding of what private markets are…
Even mutual fund heavyweights like T. Rowe Price are getting in on the action. Baltimore-based T. Rowe, a longtime 401(k) company, has partnered with Goldman Sachs to create a private wealth fund for retirement accounts. The company is also in preliminary discussions with alternative investment managers about incorporating private assets into established retirement accounts, according to people familiar with the matter. T. Rowe declined to comment. BlackRock Inc., the investment arm of State Street Corporation, and even Vanguard Group are launching their own private market funds.
Change is permeating the entire retirement industry. Take insurance broker HUB International, for example. Over the past decade, HUB has added a plan consultant in California, a retirement advisor in New York, and a wealth manager in Florida. The scandal left 10,000 401(k) plans and $178 billion in assets under its control. A key motivator is his largest shareholder, private equity firm Hellman & Friedman, whose past acquisitions include Levi Strauss & Company and DoubleClick.
Brian Collins, chief investment officer of HUB’s Private Wealth and Retirement business, acknowledges that many people are not that interested in alternative investments. But HUB says personal assets probably make more sense for some 401(k) savers. The company often approaches its customers, primarily small and medium-sized retirement plans, with ideas.
One of the investing maxims of my long-ago youth was that, just like the stockbrokers, “stocks are sold, not bought,” and economic newspapers had to drum up interest in stocks. So it’s not hard to see that persistent marketing would similarly feed off the understandable lack of enthusiasm for private equity products among ordinary, less insensitive retail investors.
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1 These restrictions are justified on paternalistic grounds. 401(k) investors should take a long-term view and not act like traders.
