Friday Letter: Bitcoin in your 401k? How about VC?

Defined contribution plans should let their members invest in private equity before they roll the dice on crypto. Pantheon is working on just such a plan for 401k plan sponsors and OCIOs.

Last June I wrote a column for Private Equity International asking why the US government made it so difficult for average Americans to participate in private markets but allowed them to bet their mortgages on Bitcoin. I wrote in part:

“The message the government is sending is that investing in an alternatives fund is riskier than putting your money into the crypto market, which lost $500 billion in a single day on 17 May [of 2021]. As Walter Sobchak so poignantly asked in The Big Lebowski: ‘Has the whole world gone crazy?’”

This week came news that retirement behemoth Fidelity plans to add Bitcoin as an allocation option in 401k plans offered by employers. The first thing that came to my mind (besides WTH) was: Why isn’t Fidelity or anyone else announcing a plan to allow 401k participants to invest part of their retirement savings in private markets?

The short answer is there are efforts underway that should bear fruit soon. Fidelity didn’t respond to my query about adding a PE allocation to 401k plans. However, Pantheon, which manages or advises more than $80 billion in assets for more than 800 institutional investors, tells me it is in ongoing discussions with 401k plan sponsors, outsourced CIOs and consultants.

“There’s a comfort level with the asset class, and they are actively looking at adding a private equity sleeve to a target-date fund,” said Pantheon partner Susan Long McAndrews. She expects a plan sponsor such as a Fortune 500 company or an OCIO to follow through later this year or next.

It was Pantheon and Partners Group that prompted the US Department of Labor to issue guidance in June 2020 about adding private equity to defined contribution plans. In April 2021, Fidelity chief investment officer Andrew McCaffery told PEI that the DOL guidance made it clear that “incorporation [of private equity] can be a good thing, and that there should be that opportunity set available to a broader suite of investors over time. We’re still in the developing stages, but the signs are encouraging.”

Supplemental statement

Another positive sign came late last December, when the DOSL (under the Biden administration) issued a supplemental statement that did not retract the earlier guidance that “a plan fiduciary would not, in the department’s view, violate the fiduciary’s duties under section 403 and 404 of ERISA solely by reason of offering a professionally managed asset allocation fund with a PE component as a designated investment alternative subject to important conditions set forth in the letter.”

“There’s comfort now for those who believe in the cause,” McAndrews told me. She said that allowing retirement plans to invest in private markets makes perfect sense. Just look at how those investments have benefited the public pensions that have invested billions of dollars in private markets for decades on behalf of teachers, police, firefighters and others.

“Public sector employees all benefit from private equity; they have professionally managed DB plans,” McAndrews said. “But people in corporate America who have 401k plans are excluded.”

As for what a PE option in a 401k plan might look like, McAndrews points to Pantheon’s 1940 Act fund, which is marketed to independent wealth managers for their accredited investors. Launched in 2015, the AMG Pantheon Fund now has about $1 billion in AUM for more than 6,000 individual investors. “Much of that capital is coming out of 401k rollovers into IRAs,” McAndrews said. “The ’40 Act funds offer those clients a diversified way for those clients to access private equity.”

“The asset allocation [for the ’40 Act funds] mirrors our house mix that we do for large pension clients,” she said. “It is predominately mid-market leveraged buyouts plus some growth equity and some venture.” It primarily invests through co-investments with GPs and through secondaries, both GP-led and traditional transactions. It has a target of about 10 percent for early stage venture, which it plans to access through direct fund investments and occasional co-investments with VCs.

Venture capital and private equity are no doubt risky investments, but they carry far less risk than digital currency. Let’s hope the democratization efforts of Pantheon and others come to fruition, allowing average Americans to participate in booming private markets.