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Equity Investing for Retirement

6 Ways Private Equity Can Play a Role in Retirement Plans

Private Equity is Not Just for Millionaires Anymore

Retirement investors growing wary over bullish public markets might consider looking to the increasingly popular private equity marketplace.

In terms of asset size and popularity, private equity has continued to grow for several notable reasons:

  • As Ernst & Young’s 2018 Global Private Equity Survey framed it, “Thanks in large part to the high returns generated by most private equity asset classes, the private equity industry continued to raise capital at record levels in 2017, bringing in more than $640 billion in new commitments.”
  • Private equity’s fundraising levels were up 5% from 2016, exceeding its 2007-2008 prior market peak.
  • The “2018 Preqin Global Private Equity & Venture Capital Report” which tracks private equity trends, noted that “95% of investors surveyed believe that their private equity portfolios have met or exceeded their performance expectations for the three years ending in 2017.”
  • Some 53% of these investors told Preqin they plan to increase their allocation to private equity.
  • The Preqin report concluded that, “With such growth prospects, even skeptics may want to acknowledge the fact that private equity is well on its way to becoming a mainstream asset class.”

As Charles Petrie, the managing director of Dolan Capital Group, LLC, framed the matter, for those financial advisers seeking diversification into alternatives, “some allocation to [private equity] can be a good idea – providing risks are measured against the potential rewards.”

With all that in mind, here are six constructive ways that private equity investing can play a role in retirement.

  1. Access to Private Equity on a Tax-Advantaged Basis

Individual retirement accounts can provide access to private equity. Using IRAs, for example, investors can invest in alternatives like private equity, real estate, precious metals and other investment choices.

  1. Pursue Long-Term Potential Return

Private equity is best considered as part of a diversification strategy – not just a pure performance plan, which benefits a retirement plan. “However, across market cycles, defined here as periods of 10 years or more,” according to Cambridge Associates, “the private equity index has historically outperformed public markets.”

  1. Add an Extra Measure of Diversification

For retiring baby boomers, an allocation to private equity may provide the type of portfolio diversification favored by many of the major pension funds. According to John C. Bogle, founder of the Vanguard Group, “Diversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”

[Editor’s Note: Interested in a deeper understanding on diversification? Check out “Diversification, Correlation and Alternatives in a Scary Market.”]


  1.  Private Equity Investing for Non-Accredited Investors

For individuals to be considered accredited investors, they must have a net worth of at least $1 million, not including the value of their primary residence; or have income of at least $200,000 each year for the last two years (or $300,000 with their spouse, if married), and have the expectation to make the same amount this year. Due to the imminent retirement of millions of baby boomers, many investors with lengthy work experience and substantial deferred-compensation may have already reached the $1 million threshold for accreditation, and may now be eligible for participation in the private equity market.

However, investing in private companies is no longer just for millionaires. While many traditional private equity opportunities are open only to accredited investors, the recent approval of new rules for equity crowdfunding may allow for considerably smaller private equity investments for non-accredited investors.

  1. Private Equity Can Offer Exposure to Familiar Industries

Retirees and pre-retirees who have spent a significant amount of time in major U.S. industries may have a private equity advantage. Their real-world experience with the product trends and economic influences in those businesses could contribute to targeted growth opportunities in private equity. Capital for private equity can be used to:

  • Fund new technologies
  • Expand working capital within an existing company
  • Make acquisitions
  • Or simply shore up a thin balance sheet for the possible betterment of publicly traded shares.

While the value of private equity opportunities changes by sector year-to-year, employees or former employees of companies in technology, consumer goods, financial services, materials and other sectors may apply their own industry insights, along with those of their financial professionals.

[Editor’s Note: It is important for any investor to consider life events while assembling their portfolio. In our excellent webinar “Goal Based Investing- Planning for Key Life Events,” we detail the “envelop system,” and why it’s so useful for investors.]


  1. Expansion of Private Equity Platforms Increases Transparency

Evaluating opportunities has become easier. For those investors who like to undertake some of their own research and then validate their assumptions with an advisor, a wide variety of online private equity platforms are available to provide access to and information about private equity investments.

In the investment business, metrics are critical to evaluating an investment’s health. A number of research companies offer comparison and screening tools for leading

alternative investment providers, including private equity firms.

Investors should always proceed with caution where investments are concerned. Private equity participation may not be suitable for everyone; there are numerous risks to investing in private equity, including the possible loss of principle.

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About John Drachman

As an award-winning writer, John developed marketing communications initiatives for dozens of money managers for more than 20 years. John combines editorial skill and marketing knowledge in helping advisors, money managers and service providers to grow and retain assets.

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