Private Equity Firms Target $4 Trillion In 401(k) Accounts

Private Equity Firms Target $4 Trillion In 401(k) Accounts
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Private Equity firms like Carlyle Group LP (NASDAQ:CG), The Blackstone Group L.P. (NYSE:BX) and KKR & Co. L.P. (NYSE:KKR) will now offer investment opportunities for ordinary people, report Bloomberg.

These large Equity firms, till now, have been investing the funds of clients who commit a minimum of $5 million; now they are lowering their threshold to attract fresh cash amid sluggish economy. The firms are opening up with an eye on the $3.57 trillion fund, which the Americans have invested in their 401(k) pension plans.

Private Equity Firms Target $4 Trillion In 401(k) Accounts

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Private Equity firm Carlyle Group LP (NASDAQ:CG) is working in close coordination with New York-based investment firm Central Park Group LLC. Central Park will accept a minimum investment of $50,000 from Individual investors, according to January regulatory filing.

CPG Carlyle Private Equity Fund will be the pool of funds from which the Central Park will locate funds to various Carlyle managed funds, seeking to invest around 80 percent of the investor’s capital in buyout. Blackstone, on the other hand, will design the investment products, which suits the needs of retail investors.

The private equity plans have been a part of many large pension plans, but they are too complicated and difficult to understand for the individual investors. Moreover, these firms charge higher fees than the traditional mutual fund, according to David John deputy director of the Retirement Security Project at the Brookings Institution in Washington.

Potential investors will need to invest the funds with these firms for more a decade with most of their investment targeted to buying companies to enhance their value and sell them for a profit. In order to finance the deals, debt is used by the firms.

An annual management fee of 1.5 percent to 2 percent of invested funds is charged compared with expense ratios of 1.27 percent on average for U.S. mutual funds and 0.65 percent for exchange-traded funds. The 20 percent of the total profit is kept aside and not invested.

The private equity funds are one of the most sophisticated investment products, which can only be sold to accredited investors. The accredited investors are those individuals who have a net worth of more than $1 million or annual earnings of more than $200,000, or institutions having assets of more than $5 million.

 According to Boston-based research firm Cerulli Associates, funds invested in 401(k) type plans will increase by around 6 percent a year to $5.03 trillion by 2016. This increase will be greater than the estimated $4.9 trillion for public pension and will also surpass private pensions.

According to Seattle based Research firm PitchBook Data Inc., returns generated by the private Equity firms from 2002 to 2012 has been an average of 14 percent.  The firms will mainly provide the target date funds to the investors. These funds are similar to mutual funds and include shares of various assets.

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