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Private Equity Investing Now Allowed in 401(k) Retirement Funds

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Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#61

Post by bpodgursky »

For 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?

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#62

Post by SpicyLemonZest »

vonmoltke wrote: post #52
SpicyLemonZest wrote: post #33

Earlier quoted context omitted.

Private firms with more than $10 million in assets and more than 2000 investors (excluding employees) are already subjected to the same scrutiny as public firms have to obey. (The complication here, of course, is that a retirement fund may be a single investor for legal purposes even if it's managing many people's assets.)

> more than 2000 investors (excluding employees) I don't think employees are excluded from this.

They're excluded if, as is usually true, they only hold shares issued under a compensation plan. (https://www.sec.gov/smallbusiness/goingpublic/exchangeactrep...)

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#63

Post by [deleted] »

wcoenen wrote: post #58
TomGullen wrote: post #38

Earlier quoted context omitted.

Google owns a 7.5% stake so you can get exposure that way

SpaceX 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]

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#64

Post by ralph84 »

mactrey wrote: post #42
SpicyLemonZest wrote: post #36

Earlier quoted context omitted.

Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of invest…

Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap. The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effec…

Before the rise of index investing, mom and pop didn't invest in stocks at all. They had a defined-benefit pension and kept their savings in a portfolio of CDs and government bonds.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#65

Post by occamrazor »

logicslave wrote: post #7
JMTQp8lwXL wrote: post #5

Private 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.

Private 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.

Catastrophe bonds don’t offer very high yields. Usually between 2 and 5 percent above treasuries, if no catastrophes happen. They have a similar return as high yield bonds, with the advantage that the losses are generally uncorrelated with the returns of other financial assets.

Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility.

There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#66

Post by occamrazor »

BeetleB wrote: post #35
throwitawayfam wrote: post #31

Can 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?

I 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 su…

How would one avoid taxes? the income is not taxed at step 3., but it is taxed at step 5. as wage income. May even end up paying a higher payroll tax.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#67

Post by JMTQp8lwXL »

bpodgursky wrote: post #61

For 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 ab…

I'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.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#68

Post by logicslave »

occamrazor wrote: post #65
logicslave wrote: post #7

Earlier quoted context omitted.

Private 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.

Catastrophe bonds don’t offer very high yields. Usually between 2 and 5 percent above treasuries, if no catastrophes happen. They have a similar return as high yield bonds, with the advantage that the losses are generally uncorrelated with the returns of other financial assets. Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally…

I call out cat bond investors because I used to work at a bond fund. Never seen so much money made so discreetly and often reliably. Highly leveraged reinsurance bets that often have constant payouts.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#70

Post by perl4ever »

drocer88 wrote: post #51
ars wrote: post #30

This 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.…

Is this assuming you can pick winners?

...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.

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