8 ms·
Private Equity Investing Now Allowed in 401(k) Retirement Funds
- bufferoverflow 6y agoI'd buy SpaceX stock, if Elon would allow.
- toomuchtodo 6y agohttps://blog.sfgate.com/pender/2015/03/25/see-which-fidelity-funds-invested-in-spacex/ https://blog.sfgate.com/pender/2015/03/25/see-which-fidelity...
- wcoenen 6y agoI believe none of the Fidelity funds have even a 0.1% weight for SpaceX. (I haven't checked recently and I can't read the blog because of HTTP 451, but I don't think this has changed.) I criticized buying Google in my other comment, but at 0.29% it's actually better than the Fidelity funds in this regard.
- deleted 6y ago[deleted]
- deleted 6y ago[deleted]
- TomGullen 6y agoGoogle owns a 7.5% stake so you can get exposure that way
- wcoenen 6y agoSpaceX is valued at $36B, times 7.5% would be $2.7B for google's stake. Divide by google's market cap of $973B and you get 0.29%. Investing $100 into Google to put 29 cents on SpaceX doesn't seem efficient. SpaceX could double in value, and the effect on the Google stock price would still be indistinguishable from noise.
- deleted 6y ago[deleted]
- JMTQp8lwXL 6y agoPrivate equity isn't an appropriate asset class for 401(k)'s. Public markets have a threshold for rules/regulations and reporting requirements. You don't want your retirement account to be a casino. You want companies that can provide stable, long-term growth of your portfolio-- so the money's there when you need it.
- logicslave 6y agoPrivate equity is commonly how the rich got rich. Theres all sorts of asset classes not available to the common public that keep them from reaping rewards. Another being investing in catastrophe bonds and insurance. Tons of fortunes made off all sorts of financial assets, that really arent that esoteric, they are just in the shadows.
- rabidrat 6y ago"how the rich got rich" is survivorship bias. Private equity is also how many people lost some or all of their life savings. I myself have "invested" tens of thousands of dollars in a few startups that have actually gone on to be moderately successful. But my equity has been so diluted that I will be lucky if I get back half of my original investment. The game is heavily biased towards the last shark in the pool, and I am not a shark.
- seibelj 6y agoRight! Absolutely no way you can lose your shirt in the public markets, right? Tell that to Wirecard investors...
- logicslave 6y agoPrivate Equity doesnt work like that, vc investing is a completely different game. If you want to stay middle class, continue investing like the middle class, i.e. etfs. If you want to move up, invest like those in the class above you do. I think the common knowledge about what kinds of risk the common man should be taking on are in some ways constructed to keep the "prestige" of finance. Its an industry built upon the appearance of competence
- mywittyname 6y agoCan we now subject large "private" firms to the same scrutiny that "public" have to obey? I always thought it was ridiculous that you could call a trillion dollar company with millions of shareholder, "private." From the sounds of it, this ruling handwaves away the inherent risk of investing in a company whose finances you have no visibility into by claiming that putting it into a diversified private fund is the same as a diversified public fund. Which is fine, but they should be subject to the same reporting requirements as public companies. These regulations didn't appear out of thin air. The business world is full of evil people looking to rob everyday investors. See: Enron.
- airstrike 6y agoI believe the assumption is the fund manager is the kind of investor that will have the ability and resources to do proper due diligence before investing, contrary to the case of public companies that can sell stock to the average Joe
- pottertheotter 6y agoBut now the issue is due diligence of the GP, the fund manager. I think that's what OP is talking about. PE firms don't have the same level of disclosure requirements as public companies (with the exception of those that are now public companies), and you need to research a fund just as you would research a stock. Fund investors are usually family offices, endowments, foundations, fund of funds, secondaries funds, etc., and they all do a huge amount of due diligence on prospective fund investments. It's just as much work to research funds as it is to research public equities. For reference, I have been an investment professional at both a PE firm and a hedge fund.
- airstrike 6y agoBut similarly, to my knowledge only accredited investors may invest in PEs / HFs, and shares in those funds are special kinds of securities that differ significantly from those covered by SEC / blue-sky laws and therefore are not subject to the same disclosure requirements. It's not in anyone's interest to treat these different types of investments as if they were similar. I'm not in PE per se, but would think investment in one is through an investment contract which is an exempt security
- deleted 6y ago[deleted]
- JustSomeNobody 6y agoSigh. Just another avenue for wealth transfer. Thanks Trump!
- deleted 6y ago[deleted]
- ars 6y agoThis opens up some excellent tax avoidance strategies. I'm assuming this is available also for IRA and Roth IRA. What you do is setup two transactions: One that will lose money in the IRA, and the other that will gain in the Roth IRA. (A straddle.) Make sure you execute both at the same time (if it's a thinly traded security you can end up trading with yourself, but that's not necessary). Then sell, and do it again. You effectively move money from IRA to Roth IRA. (And yes it's legal, I contacted the IRS and asked.) In the open market you can only move a small percent at a time, but with private equity the gains and losses are much greater and you can effectively move all your money.
- drocer88 6y agoIs this assuming you can pick winners?
- perl4ever 6y ago...and if you can, why bother with the losing side of the transaction? Conversely, if you can't pick winners, then I think you can only set up a pair of trades which sometimes moves money in and sometimes out, with a net of zero. I tried making charts of option prices in Excel and didn't come to any particular conclusion, except that maybe you always lose because of the dividend rules, spread, and commissions, and it seems like the maximum expected value is at-the-money. It makes me think of violating thermodynamics with Maxwell's Demon. If you trade with yourself, then it would be uninteresting plain fraud, and if you don't, I have the feeling the market will prevent you from getting anywhere.
- throwitawayfam 6y agoCan someone set up a "professionally managed fund" where you can set up an LLC, have the fund invest your 401k in that LLC, pay yourself a salary equal to the amount invested? Bypassing early withdrawal fees for some nominal fee?
- sukilot 6y agoIf you want to go to prison for securities fraud, sure.
- BeetleB 6y agoI suspect you phrased this poorly: 1. I set up an LLC. 2. I have a regular job which is earning me income. 3. I put some of that income into a 401K. 4. I direct the 401K to invest in my LLC. 5. As the guy running the LLC, I take that amount of money and pay myself a salary equivalent to what I put in. How is that money ever going to grow? What's the benefit? You didn't pay taxes? Pretty weak benefit, IMO. There is such a thing as self directed retirement. People buy real estate with it all the time. The regulations require, though, that any profits made out of it must go back into the retirement account until you're old enough to withdraw. I could use retirement money to buy a broken house, fix it up, and flip it. But all profits have to go back into that account. I cannot keep any for myself.
- throwitawayfam 6y agoI did word it poorly, and you captured what I was trying to get at (thanks). The benefit is for people that need to withdraw from their 401k before retirement without getting hit with the interest/fees. I guess another part of the benefit is if you want to take advantage of employer match but you don't want to invest in your 401k. I didn't know about self directed retirement. I'll have to go do some research.
- BeetleB 6y agoWell, avoiding taxes, and getting employer matches are the benefits, but you haven't explained how the amount will grow. You haven't invested it in anything.
- kchoudhu 6y agoI can't buy OTM options expiring tomorrow in my 401k and somehow PE is allowed?
- mancerayder 6y agoDon't many (most?) private equity funds have very very long horizons, like 10 years? And perhaps that's a mitigating factor to the opaqueness?
- Havoc 6y ago12 is common though many allow for a couple of extension years to sell the stuff
- peter303 6y agoDidnt Mitt Romney shield a fortune from taxes by wrapping Bain Inc deals inside IRAs? Sounds kind of similar.
- drocer88 6y agoIRA withdrawals are taxable at income rates: 37% for that kind of jack. He's delaying rather avoiding. If he was really smart, he'd have done this outside of a retirement account and paid the 20% capital gains rate.
- whitepoplar 6y agoHe did it in a Roth IRA.
- drocer88 6y agoDid he? All I can find is that it was a SEP-IRA : https://www.forbes.com/sites/forbesfinancecouncil/2018/08/03/mitt-romneys-retirement-account-makes-case-for-roth-iras/#34ff0702215a https://www.forbes.com/sites/forbesfinancecouncil/2018/08/03... "At the time, Mr. Romney was not able to use a Roth IRA to make these investments because his income tax bracket exceeded the allowable threshold."
- deleted 6y ago[deleted]
- bpodgursky 6y agoFor those against -- do you really prefer that only well-connected billionaires are allowed to invest in startups, and actually capture the rapid growth? Most unicorns (and no, they aren't all scams -- many are pretty stable, or exited successfully, a la LinkedIn, Salesforce, etc) were private until they were worth tens of billions. Any gains post-IPO are small multiples of the original investment. The only people able to invest, and actually capture that growth, were already wildly wealthy. Do you think that's fair?
- JMTQp8lwXL 6y agoI'd consider permitting it outside of 401(k) funds. But the quality of private equity investment opportunities offered to middle class people != the quality offered to folks like Tiger Woods, who investing in Google's Series A back in '99.