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Six Ways Private Equity Can Play a Role in Retirement Plans

Private Equity is not just for millionaires anymore.



While some investors look warily at the aging bull market, the private equity category seems likely to grow in popularity through 2017.

In fact, this formerly niche asset class appears increasingly mainstream.

Private equity grew from $30 billion in assets in 1995 to $4 trillion today — a growth rate of almost 28% a year, according to the 2016 SEI Private Equity Survey.

In contrast, long-term mutual funds in the U.S. grew sevenfold in assets over the same period of time (and only 10% annually).

Of those surveyed, the median prediction suggested that private equity will grow to $7 trillion within 10 years. The survey concluded that “[w]ith 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.”

Private Equity in Your IRA

If you feel maxed out on traditional equities, consider looking in alternative classes.

“[S]ome allocation to private equity can be a good idea — providing risks are measured against the potential rewards,” according to Charles Petrie, managing director of Dolan Capital Group, LLC.

“Private equity opportunities can be accessed through individual retirement accounts such as self-directed IRAs,” says Jeffrey Kelley, senior vice president of Equity Institutional. “The power of a self-directed IRA comes from its almost limitless access to investment options like private equity, real estate, precious metals or other alternative to traditional investment choices.”

(Kelly brings 20 years of experience in financial services operations management. He understands the administrative and custodial challenges of private equity, equity institutional — through equity trust company — and other private investments in IRAs or other qualified retirement accounts.)

Financial advisors and investors alike may really enjoy the idea of investing alongside some of the nation’s leading institutional investors. For those who do their homework, private equity can offer six constructive ways to play a role in retirement planning.

#1 Private Equity with Tax Advantages

Historically, accredited investors who participated in private equity faced taxation from the IRS. Through a self-directed IRA program, however, investors gain access to the potential benefits of private equity on a tax-advantaged basis.

“Investors reap all of the tax advantages that come with investing through a government-sponsored retirement vehicle,” says Kelley.

IRA-minded clients, as well as their advisors, must undertake their own review and analysis of private equity investments. Mr. Kelley noted that while custodians can facilitate investment in private equity opportunities operationally, the law prohibits them from performing any due diligence oversight.


#2 Potential for Long-Term Returns

While no investment is guaranteed, private equity exceeded or met investor expectations 95% through 2016, according to the 2017 Preqin Global Private Equity & Venture Capital Report.

(Preqin provides research on alternative asset trends to some 47,000 professionals located in over 90 countries.)

“2016 was another stellar year for private equity,” the Report states, “and the total AUM for the industry now stands at $2.49 trillion as of June 2016 (the latest data available), an all-time high.”

#3 Private Equity Adds Diversification

Private equity may provide the type of portfolio diversification favored by many of the major pension funds.

According to Paul D. McConville, president of Quincy Capital Partners, LLC:

“Self-directed IRAs invested in private equity or other alternatives may provide a way for investors to diversify a portfolio beyond traditional equity, bond and mutual fund choices,” said Paul D. McConville, president of Quincy Capital Partners.

“In effect, with a self-directed IRA, investors may gain a wider scope of action for how, when, and where to invest their retirement assets,” continued Mr. McConville.

John C. Bogle, founder of the Vanguard Group, added that “[d]iversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”

#4 It’s Easier than Ever to Invest in Private Equity

Traditionally, the U.S. government only allowed accredited investors to invest in private equity.

Due to the imminent retirement of millions of baby boomers, many investors 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, a growing number of opportunities exist for non-accredited investors.


“With approval in 2016 of new rules for equity crowdfunding,” Mr. Kelley continued, “even average investors can invest in some private equity investments with smaller asset amounts. They can also invest in closed-end funds, such as those created through publicly traded private equity stocks known as business development companies (BDCs).”

#5 You Can Maximize Your Professional Expertise

Many retirement-age individuals accrued a professional lifetime of experience in the very industries that create growth opportunities in private equity. Former employees of companies in technology, consumer goods, financial services, materials and other sectors can apply their own industry insights — with help from trusted advisors — to vet potential opportunities.

#6 Private Equity Offers Improved Transparency

Many investors prefer to validate their assumptions with advisors and experts. For these investors, there exists a wide variety of online private equity platforms to provide information.

Additionally, a number of research companies offer comparison and screening tools for investment providers and private equity firms.

Investors should always proceed with caution where their money is concerned.

“It is also important to consider the qualifications of their custodian,” Mr. Kelley concludes, “to ensure its board of directors, officers and employees all work within a well-established system of internal controls and administrative oversight.”


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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