Relaxing the Fiduciary Rule?

The Fiduciary Rule, which would prohibit investment advisors recommending high-cost investment products like private equity funds to individual retirement plan clients, was due to kick in in April. But US president Donald Trump had ordered a review of it as this magazine was going to press. This would delay, if not abolish, the legislation.

Scrapping the rule could allow private equity firms to tap into the estimated $6.8 trillion held in defined contribution individual pensions known as 401(k)s. Private equity firms Partners Group and Pantheon have already launched in the space.

To do so, they have had to review their investment and portfolio building strategies. While 401(k) investors can benefit from the above-market returns generated by private equity investments, they also need daily liquidity, have less capital to commit than institutions, and cannot pay the fees associated with a traditional private equity investment. 

Partners Group's 401(k)-friendly fund was designed to be adopted by target date funds and the firm adapted its valuation policies and procedures to meet the market's requirements for daily valuations and liquidity. The fund, which is structured as a collective investment trust, mostly gains its exposure to private equity through a concentrated investment in an existing private equity product managed by Partners Group. To facilitate daily liquidity, the vehicle also invests in a diversified, global portfolio of listed private markets investments, including listed private equity, listed infrastructure and cash equivalents.

“We were well positioned to launch the product because we have been managing private markets programmes with liquidity features globally for about 15 years,” Robert Collins, managing director at Partners Group, says.

While it is in the minority in the 401(k) market, it is among a wider group of private equity firms targeting defined benefit pension plans, small institutional investors and private clients with pooled investment vehicles, also known as '40 Act' products.

Partners Group launched a US '40 Act' product, Partners Group Private Equity, in 2009. According to a filing with the Securities and Exchange Commission, as of 30 September 2016, more than 60 percent of the fund was invested directly into private companies, with around 14 percent in private equity secondaries and 8 percent in primary investments into private equity funds. The vehicle provides monthly liquidity and has a minimum investment amount of $50,000, according to documents attached to the filings.

With smaller minimum investment requirements, and diversified portfolios designed to be semi-liquid, these funds offer private equity exposure to investors that face barriers to entry into traditional funds.

As yet there is no deadline for a decision on the Fiduciary Rule. But as individual savers begin to move away from the defined benefit schemes towards defined contribution pensions, if the rule is scrapped it could trigger the launch of 401(k)-friendly funds by other firms keen to follow the likes of Pantheon and Partners Group.