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More Inroads for Private Equity

In recent years, the use of private equity (PE) as part of an asset allocation strategy has increased substantially. Investors have come to recognize the advantages of this class of alternatives both as a source of added returns and as a portfolio diversifier. The opportunity set in PE is also growing while the relative number of public company investments is declining.

Due to the complexity, cost and illiquidity of most PE investments, those able to benefit from the asset class to date have largely been institutions and UHNW individuals, who are typically considered accredited or qualified investors. However, this may be about to change.

This week the U.S. Department of Labor issued an Information Letter under ERISA concerning private equity investments as a component of a professionally managed asset allocation fund offered as an investment option for participants in defined contribution plans. The Letter concluded that: “a plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter.”

In effect, the DOL put its stamp of approval on PE investments in DC plans when they are part of an asset allocation fund. This is a significant development in potentially enhancing access to more sophisticated investment options for plan participants while expanding the market for PE firms and firms that package and distribute PE-based solutions.

The acceptance of PE in the DC market will depend in part on whether portfolios are constructed to provide appropriate risk management for investors and, longer-term, how PE enhanced portfolios perform. We continue to monitor the market in the DC space going forward, as well as the impact on target date portfolio construction and availability in the 401k marketplace.