Executive Order Opens the Gates to Private Markets

US President Donald Trump signed an executive order on August 7 directing the Department of Labor and SEC to issue guidance on the inclusion of private market assets in 401(k) plans, marking a pivotal step toward unlocking a major new source of demand for private assets and substantially accelerating the democratization of the asset class.

Of the $12.2 trillion currently held in Defined Contribution plans, $8.7 trillion is invested in 401(k) plans, a figure poised to grow because of the recent introduction of regulations requiring automatic enrollment alongside a $500 increase in the maximum annual contribution limit. If current 401(k) participants were to allocate just 10% to private investment offerings, nearly $900 billion of fresh capital would be heading for the private markets. This capital would be on top of the surging activity in evergreen and semi-liquid funds, which have been busy accumulating individual investor assets in their own right. By some accounts, the evergreen and semi-liquid markets have already attracted several hundred billion dollars in assets and are also expected to grow at strong clips. A recent survey indicated more than half of all private capital flows are projected to come from individual investors within two years.

By comparison, the institutional private equity and venture capital market has been in a slump, driven by a prolonged distribution drought that has trapped capital, much of which was invested at excessive valuations in 2021–22 that has yet to be productively harvested. This lack of distributions, coupled with short-term underperformance against public markets, has translated into several years of reduced commitments to the private asset classes. With institutional investors essentially on the sidelines, individual investors are an attractive source of capital for managers able to access them through the 401(k) market.

Target date funds (TDFs)—a growing subset of 401(k) strategies that adjust asset allocations as plan participants approach an expected year of retirement—could serve as the best place for private markets capital, given their long time horizons. General partners (GPs) offering private markets exposure to 401(k) participants will face challenges, including providing TDF managers the ability to rebalance, redeem, and access daily valuation information on private investments, which is not easy due to the highly illiquid nature and reporting constructs of private markets. Although their professional management and pooled nature can allow for more effective implementation, TDFs are still subject to all the liquidity and valuation requirements of a broader 401(k) offering. GPs will also have the challenge of delivering historical private investment returns in a structure that could impede the very elements that helped to generate those returns, including the requirement to invest immediately, which can impact entry valuation discipline and therefore returns.

What’s an institutional investor to do? We advocate “following the money,” by observing where it is accumulating because that will be where the pricing and return pressure will be most intense and investing in tiers of the market that stand to benefit from this burgeoning supply. Thankfully, with thousands of GPs in which to invest, the opportunity set for institutional investors extends far beyond those GPs in hot pursuit of the individual investor. Many investors can pursue compelling private investments at any tier of the private economy across a wide range of strategies and styles. Additionally, the current fundraising lull will likely result in less intense competition for portfolio companies that are beyond the reach of private investment funds servicing 401(k) funds over the next few years, potentially creating better opportunities and, therefore, stronger returns for intrepid institutional investors.