Private Market Assets Become The Next Frontier In Retirement Saving

President Trump is expected to sign an executive order this week that could fundamentally change the way Americans save for retirement. The order would open the door for 401(k) plans to include private equity, venture capital and other so-called “private market” assets. These investments have historically been available only to more institutional-level investors. They’ve mostly been off-limits to everyday investors, but that appears to soon be changing.

To provide some important context, there are a few ETFs out there already that have “private” in the name. You may assume that those invest in the private market assets that Trump is talking about, but, as is the case with any ETF, you need to look under the hood to see what it’s actually doing.

Luckily for you, I’ve done the work!

• Invesco Global Listed Private Equity ETF (PSP) - In simplest terms, this fund invests in the publicly-traded companies that invest in privately-held companies. You’re not trading in private companies themselves. There’s probably some indirect exposure there, but you’re really investing in the financial health of the BDCs. Examples of holdings would be Blackstone, KKR and Carlyle.

• ProShares Global Listed Private Equity ETF (PEX) - This fund has essentially the same objective as PSP of investing in the companies that invest in privately-held companies.

• SPDR® SSGA IG Public & Private Credit ETF (PRIV) - This one’s actually different in that it invests in the investment-grade bonds of both public and private issuers. You are getting some fixed income exposure to the private markets, but it’s usually less than half of the portfolio. The other sleeve typically consists of Treasuries, MBS and other corporate bonds. There’s minimal exposure to the private markets at best.

Under the Trump order, retail investors could find themselves gaining exposure to several “non-traditional” asset classes, such as private equity, venture capital, hedge funds, real estate and crypto. If it goes through, this would mark one of the most significant overhauls to retirement investing in years.

The idea at a high level is a good one. Broadly speaking, it’s good to give investors choices, especially in retirement plans that may offer only a narrow menu of index fund options that lack diversification potential. This order would certainly add new items to that menu, but given their complexity and illiquidity, does that make it a good idea?

Let’s take a moment to consider both the good and the bad.

The Good

Higher Potential Returns

Historically, private equity and venture capital have done a good job of producing returns that have topped those of both traditional stocks and bonds. They’ve also tended to be less correlated with the public markets, which makes them a good option for diversification and overall risk reduction benefits. This is part of the reason why a number of large pension funds and endowments often commit at least a portion of their capital to private investments.