An article in the Wall Street Journal details a plan by Carlyle Group (CG) to accept investments as small as $50,000 into its private equity funds, albeit through an intermediate vehicle. (Perhaps we could call it a “feeder fund” if that term hadn’t been sullied.)
What’s particularly interesting is the focus on defined contribution plans as a key to growth for the buyout behemoths. The defined benefit plans, especially public plans, that have fueled the growth in private equity are unlikely to continue to do so to a great degree. Thus the focus on the 401(k) market.
The Journal said that some private equity executives called “access to that pool of money their ‘holy grail.’” David Rubenstein of Carlyle made a particularly bold call: “Within two to four years, he predicted, trillions of dollars stashed in 401(k) plans will flood into private-equity ‘in ways that we can’t completely envision today.’” Really?
I have a lot of questions (check out, for example, the confusing last paragraph of the article about avoiding up-front fee hits by buying interests on the secondary market) and concerns. Principal among the latter is that these offerings will feed into the current mentality among many investors that they have to buy certain kinds of alternatives right now, that it’s the only place to find high enough returns long-term to fund their future plans.
Is this just another phase in the evolution of our markets, one that will look completely normal in years to come? Or is it just a clever way for the private equity funds to mine a new vein of cash, a move that will be seen in hindsight as a turning point, just as the excesses of 2007 have come to be viewed?