3-minute read
How do you feel after seeing a headline like this?
Honestly, I couldn’t tell you the first thing about private equity.
Private equity firms gather money from wealthy individuals and institutional investors (e.g. pensions, endowments, foundations). The PE firm will purchase private companies with these funds and help manage and restructure these companies. The end goal is to increase their value and sell them for a profit years later.[1]
Seems harmless enough.
Well, it doesn’t come without its fair share of haters.
And why is that?
Critics of PE often refer to these firms as corporate raiders. They acquire a company, saddle them with significant debt, and violently cut costs, including jobs. The goal is to turn a short-term profit for investors and then find their next “opportunity”.[2]
And the rebuttal to that would be…?
Proponents would argue that PE firms provide necessary capital and industry expertise for private companies. This can lead to operational improvements, innovation, and increased profitability.[3]
So, my understanding is that PE has been around for decades. Why are you and I just talking about it now?
President Trump recently signed an executive order intended to increase 401(k) investor access to alternative asset classes – an umbrella under which PE falls. Technically, private equity is allowed in 401(k) plans, but the government has historically cautioned companies against it.[4]
Is this really worth talking about? Or is it something finance nerds are blowing out of proportion? You just said it’s already allowed in 401(k) plans…
It’s definitely worth discussing. 70 million Americans are estimated to have a 401(k) retirement plan. That’s one-quarter of the country’s adult population. Of those 70 million plans, less than 4% offer employees the option to invest in PE. 401(k) plans are a $15.5 trillion pie and PE has a mere 1% slice.[5]
So, what’s your position on it?
I’m anxious about it. It reeks of” “We need more money! Let’s go to Main Street to get it!”
What exactly do you mean by that?
I mentioned earlier that PE firms raise money – BILLIONS of dollars – to invest in these private companies. They typically have raised money from pension funds, endowments, foundations, and wealthy individuals. Now, all of a sudden, they want a $25k slice of Mr. Smith’s 401(k) account? I don’t know, man…
You’re right. It doesn’t seem to pass the smell test.
However, is it really fair that access to private equity investments is effectively restricted to those entities? Some PE firms make a great return for their investors. Should Mr. Smith have to sit on the sidelines?
Fair point.
It’s not black and white. I could easily imagine a day in 10 years where most people have access to PE in their 401(k) plans.
How do you think that will play out?
I imagine it’ll get off to a rocky start. Mr. Smith could have a terrible experience with it, but his daughter may benefit from it down the road.
What’s your final take on this as someone who gives financial advice for a living?
There is no requirement to add PE to your 401(k) account if/when it becomes more widespread. Investors have done just fine with stocks, bonds, gold, etc. If you do go down the path, start small. A 5-10% allocation is just fine. Remember, FOMO is not a sound investment strategy.
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[1] Source: https://www.investopedia.com/terms/p/privateequity.asp
[2] Source: https://www.linkedin.com/pulse/unveiling-veil-navigating-controversies-criticisms-2rbnf
[3] Source: https://digitaldefynd.com/IQ/role-of-private-equity-in-corporate-restructuring/#:~:text=Private%20equity%20(PE)%20firms%20play,toward%20efficiency%20and%20market%20repositioning.
[4] Source: https://www.axios.com/2025/08/15/trump-private-equity-401k
[5] Source: https://www.cnbc.com/2025/03/11/private-equity-wants-a-larger-piece-of-workplace-retirement-plan-assets.html