Defined Contribution Plans Can Now Invest In PE Funds

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Defined Contribution Plans Can Now Invest In PE Funds
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The Department of Labor recently released guidance that will have a tremendous impact on investments in the private equity industry. The guidance clarifies that adding a private equity fund to a defined contribution plan, like a 401k, is permissible under ERISA. This will allow PE funds (and VC funds) to become involved in the massive defined contribution pension plan industry of almost $8 trillion – one they haven’t been involved in before – but managers need to quickly get up to speed on how to structure these investments while minimizing risks and other compliance issues that could come with the change.

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How PE Managers Can Manage Commitments By Defined Contribution Pension Plan Investors?

Kevin Neubauer, partner at Seward & Kissel LLP who previously served as in-house counsel at a large private equity firm, discusses how private equity managers can manage this potential increase in commitments by benefit plan investors, as well as the short and long term issues they should be aware of. For example, Kevin can discuss why managers should:

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  1. Make sure they are up to speed on calculating the ERISA 25% test, particularly where there might be multiple classes of interests;
  2. Know how to handle back-ended carried interest when a fund is over 25% (there are many issues at play when a fund crosses this threshold); and
  3. Understand fund structuring/ERISA hard-wiring generally as it relates to this change.

As we move forward, we can certainly expect more investments in this space, and Kevin addresses why PE and VC managers need to understand what this change means and how they can strategically adapt.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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