Private Equity: Be careful what you wish for
For years, large private equity firms have lobbied to gain access to smaller investors. Specifically, there has been a long-running campaign to add private equity investments to 401(k) plans. It appears those efforts may be starting to pay off.
What is private equity? Private equity is pooled capital that is often invested in non-publicly traded companies. Investors are limited partners, and their capital is used to invest in or acquire companies the general partner believes can deliver long-term growth. (The general partner is the entity that collects capital from the investors.) Sometimes, publicly traded companies are taken private because the general partner believes there are ways to make the companies more profitable.
How does it work? When a general partner takes over a company, the emphasis is on profitability. While many private equity investments yield more efficient companies, some general partners are known for slashing jobs and related expenses. The goal is to turn a profit and to set the company up for sale in a timeframe that’s often 5-7 years. Once sold, the limited partners hope to get a return of their capital and a return on the use of their capital (e.g., profit).
The downside: For investors, the worst investment is one that doesn’t provide a return, such as when a business fails or is ultimately sold for less than its original purchase price. Fortunately, general partners often invest in multiple companies, so if one fails, another (or others) may provide better returns.
The upside: A host of successful company turnarounds and success stories have come out of private equity. If a privately held company goes public or is sold at a valuation that is multiples of the initial investment, limited partners are likely to realize handsome returns.
What can go wrong?
There are a few significant issues related to private equity 401(k) plans, including valuations, accessibility, and fees.
Valuations: Publicly traded companies are traded on public stock exchanges, so investors know the price of their stock from minute to minute. Valuations for private equity investments, however, are set by the general partner, who has a vested interest in making the company’s investments look good so they can raise even more capital from other investors for future investments. Thus, absent market pricing, investors can never be certain as to the true value of their investments.
Accessibility: Unlike publicly traded companies, limited partners cannot sell their investments when they want to do so. They do not have unlimited access to those funds. Rather, the dollars they invest are likely to be locked up for some period of time (e.g., 5-7 years). While general partners often release a percentage of invested dollars each year for those who want to redeem, not everyone who wants to redeem can. Thus, during market downturns or if an individual investor has an emergent need, their private equity dollars are likely not available. (For an in-depth look at accessibility, Jason Zweig of the Wall Street Journal wrote an excellent column titled: This Small-Town Pension Fund Has a Warning for Millions of Retirement Savers1. But it’s the tag line that says it all: “If you think cashing out of a private fund is easy, just ask a guy who used to manage $750 billion.”
Fees: Notes Zweig2: “Asset managers…have concocted a zillion ways to disguise their fees.” In the case of private equity investments, it’s possible that the general partners may not even be required to disclose fees in the fund prospectus. “Despite overwhelming evidence to the contrary, many individual investors still want to believe higher fees are associated with higher returns.”
Who benefits?
General partners are typically first to benefit on these types of investments, regardless of how their investments perform. They benefit because they collect a fee each year, and then a much larger percentage when investments are sold. (2 & 20 is a common fee structure. General partners receive 2% of invested dollars each year, and then 20% of profits, typically after returning capital.) If you’re a general partner, the more dollars you can collect, the greater your return.
Investors are likely to benefit if the general partner invests their dollars into businesses that grow and are sold at a higher valuation. That’s why it’s so important for general partners to cut costs and reduce expenses once they take over a struggling company.
Investors may also benefit from diversification, as private equity investments don’t necessarily perform in-line with publicly traded stocks or bonds. Thus, a well-structured private equity fund may add diversification to an investor’s portfolio.
If your company offers a 401(k) plan that includes an investment option for private equity, let’s talk. Yes, it may be beneficial for you to invest some dollars into that option, but a little research into the general partner is a prudent first step.
1 Zweig, Jason. “This Small-Town Pension Fund Has a Warning for Millions of Retirement Savers.” The Wall Street Journal, 7 Nov. 2025.
2 Zweig, Jason. “Congress Thinks Hiding Fund Fees Is Good for You.” The Wall Street Journal, 10 Oct. 2025.
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