1. Private equity
THE 401(K)
CHALLENGE
APRIL 8, 2013
Big private equity firms are working to
make their products more accessible
to non-accredited investors, with 401(k)
plans seen as the holy grail. Here,
we explore the stumbling blocks and
potential solutions.
inside:
Biggest Buyout Firms target $3.6 trillion 401(k) Market in Growth Push, p. 2
q&a: veneruso of Callan associates says valuation, Fee issues Must Be addressed, p. 4
q&a: debevoise Partners Predict ‘Meaningful’ amount of Capital for Pe, p. 5

2. 04.08.13 www.bloombergbriefs.com Bloomberg Brief | Private Equity Supplement 2
LP WatCH
Biggest Buyout Firms target $3.6 trillion 401(k) Market in Growth Push
BY MARGARET COLLINS AND Defined Benefit Plans: A Dying Breed?
DEVIN BANERJEE
Private-equity firms are discovering a 800,000
new type of client: ordinary people. Defined Benefit (# of Plans) Defined Contribution (# of Plans)
Carlyle Group LP, Blackstone Group 700,000
LP and KKR & Co., which usually open
their doors only to clients willing to com- 600,000
mit at least $5 million, are lowering that
threshold or offering investments directly 500,000 DB Plans Frozen, 2011
to individuals in an effort to attract fresh
400,000 Frozen
cash amid lackluster fundraising. Their
ultimate goal: a slice of the $3.57 trillion 25%
300,000
Americans have accumulated in their Open
401(k) retirement plans.
200,000 75%
The firms are looking for ways to move
down-market as a growing number of work- 100,000
ers are pushed out of public and corporate
pension funds and into 401(k)-style plans. 0
“We definitely would like to be part of
401(k) platforms,” Michael Gaviser, a
managing director responsible for indi-
vidual investor products at KKR, said in an Source: Department of Labor
interview at the firm’s New York headquar-
ters. “We think about it every day because Private-equity funds raised $312 billion in November, is an open-end fund with a
there’s so much demand.” globally last year, less than half the $669 $2,500 minimum investment and the op-
Private-equity funds under U.S. rules billion gathered in 2007, according to data tion to withdraw money daily. The Alterna-
can only be sold to accredited investors, from Preqin Ltd. Fundraising closed after tive Corporate Opportunities Fund is an
defined as individuals with a net worth of an average of 17 months in 2012, com- unlisted closed-end fund with a minimum
more than $1 million or annual earnings pared with 12 months in 2007, according investment of $25,000 and quarterly
of more than $200,000, or institutions to Preqin. liquidity. The funds, which will invest in
with more than $5 million in assets. Some With traditional investors reluctant to assets such as high-yield bonds and bank
401(k) plans may qualify, though employ- commit new money, firms are getting loans, are the first pools managed by KKR
ers must ensure the investments offered more serious about accessing individual that are structured like mutual funds.
have fees, risk, transparency and liquidity retirement plans, which have been a The firm is close to being able to add
that are appropriate for plan participants. reliable source of growth for traditional the high-yield fund to its own 401(k)
asset managers such as Boston-based plan through Fidelity, according to a
401(k) Plan Growth Fidelity Investments. person familiar with KKR’s plans. KKR
Defined-contribution plans such as Assets in 401(k)-type plans will grow views that as a step toward offering the
401(k)s let workers and employers contrib- about 6 percent a year to $5.03 trillion investments to other Fidelity 401(k)-plan
ute to a retirement account that’s run by by 2016, surpassing the $4.9 trillion participants, said the person, who asked
the employee. The individual’s investing projected for public pensions and widen- not to be identified because the informa-
decisions directly affect his or her retire- ing their edge over private pensions, tion isn’t public.
ment income. Traditional pension plans, according to Boston-based research firm Nicole Goodnow, a spokeswoman for
known as defined-benefit plans because Cerulli Associates. Fidelity, declined to comment. Fidelity is
they promise a lifetime payment, pool “We’re seeing a great level of interest the nation’s largest provider of 401(k)s.
large amounts of money and usually have by investment managers who have never Blackstone is seeking to develop prod-
professional managers to invest it in a worked in the defined-contribution space ucts that would be suitable for individual
variety of assets. to find a way for their products to fit,” said investors, according to a separate per-
Traditional pensions like the California Lori Lucas, defined-contribution practice son. Christine Anderson, a spokeswoman
Public Employees’ Retirement System leader at San Francisco-based Callan As- for New York-based Blackstone, declined
are among the biggest investors in private sociates Inc. to comment on the plans.
equity, though they have become more KKR last year started two debt funds The firm last year partnered with Boston-
selective after losses during the 2007- for individual investors. The Alternative based State Street Corp. to create an
2009 financial crisis. High Yield Fund, which became available continued on next page
1 2 3 4 5 6

3. 04.08.13 www.bloombergbriefs.com Bloomberg Brief | Private Equity Supplement 3
LP WATCH…
continued from previous page
exchange-traded fund for speculative- get-date funds, the most common default Employers can take years deciding
grade loans. The fund, SPDR Blackstone/ option for employees joining the plans, on 401(k) investment choices because
GSO Senior Loan ETF, started trading this said Callan’s Lucas. The funds usually are they’re liable under Department of
week under the ticker SRLN. structured as mutual funds and hold a mix Labor regulations as fiduciaries, mean-
Carlyle is starting a fund with New of assets that becomes more conservative ing they must act in the best interest of
York-based investment firm Central Park as employees near retirement age. employees and select suitable funds with
Group LLC that will accept as little as The funds could add an alternative prod- reasonable fees.
$50,000 from individual investors, accord- uct as part of the asset allocation with oth- The spread of alternative assets to
ing to a January regulatory filing. Central er sources of liquidity, Lucas said. Large 401(k)s will be slow because of “the na-
Park Group will allocate money from the employers increasingly are using formats ture of the market,” said Kevin Chisholm,
pool, called CPG Carlyle Private Equity such as collective trusts or creating cus- associate director at Cerulli.
Fund, to a variety of Carlyle-managed tomized versions, which are regulated dif- BlackRock Inc., Fidelity, T. Rowe Price
funds, with the aim of putting as much ferently from mutual funds and may allow Group Inc. and Vanguard Group Inc.,
as 80 percent of the investors’ capital in for more illiquid investments, she said. four of the largest providers of target-date
buyouts. The minimum commitment to Assets in target-date funds will more funds in 401(k)s, said they have no im-
Carlyle’s funds is typically $5 million to than double to $1.1 trillion by 2017, accord- minent plans to add private equity.
$20 million. ing to Cerulli. The added cost and complexity of
Carlyle expects its investment products “As that custom target-date world contin- alternatives have kept T. Rowe Price from
may eventually reach 401(k) plans, said a ues to develop, consultants are going to including them in its target-date series,
person with knowledge of the firm’s strategy. want to bring more sophisticated invest- said Richard Whitney, director of asset
Pensions have benefited from the ability ments to their clients,” said KKR’s Gaviser. allocation at the firm. Over time, there will
to access a wider array of asset classes, “They’re trying to find greater returns, but be a convergence of practices seen in
said Alan Glickstein, senior retirement they can’t access the same investments pensions with those in 401(k)s, he said.
consultant at Towers Watson & Co., a that defined-benefit plans can yet.” “I believe in the future non-accredited
New York-based professional-services U.S. Senator Tom Harkin, an Iowa investors will ultimately be able to invest
company. Defined-benefit pension plans Democrat and chairman of the Senate in private equity,” Carlyle co-founder
outperformed 401(k)-type accounts by an Health, Education, Labor and Pensions David Rubenstein said in September. “It
annual average of 93 basis points from Committee, is pursuing changes to 401(k) will be possible in the future where 401(k)
1995 through 2008 after adjusting for fees, plans. Harkin has said he will introduce check-off plans will be able to say, you
according to Towers Watson’s latest data. legislation this year that would create can take a certain amount of your money
“A 1 percent per year difference com- so-called USA Retirement Funds blend- a year and go into an illiquid private-
pounds to a huge differential over a ing features of pensions and 401(k)s to equity fund.”
person’s working and retirement lifetime,” improve worker outcomes.
Glickstein said. A saver investing $100,000
over a decade at an annual rate of 8
percent, for instance, would earn $19,177 Defined Contribution Plans Growing Faster Than Defined Benefit
more than he would at a rate of 7 percent.
Private-equity funds returned an average
of 14 percent from 2002 through 2012, IRA
according to Seattle-based researcher
PitchBook Data Inc. U.S. stock funds
gained an annualized 8.4 percent and 2012E-2017E
bond funds rose 5 percent a year, accord- Public DB
ing to Morningstar. 2006-2011
Investments that private-equity firms ulti-
mately bring to 401(k)s may not mirror what Private DB
they’ve offered to traditional pension plans
and wealthy clients, said Laura Pavlenko
Lutton, director of fund-of-funds research Public DC
at Morningstar. A diluted version that fits in
401(k)s may not generate the returns that
justify higher fees, she said. Private DC
Target-Date Funds
The likely entry point for private-equity -2% 0% 2% 4% 6% 8% 10%
firms seeking access to 401(k)s are tar- Source: Cerulli Associates
1 2 3 4 5 6

4. 04.08.13 www.bloombergbriefs.com Bloomberg Brief | Private Equity Supplement 6
You are reading a special sample copy of
Bloomberg Brief: Private Equity
Take your no risk 30 day free trial today!
Introducing Bloomberg Private Equity – a new
groundbreaking newsletter for the Private Equity business from
Bloomberg, the premier source of data and analytics in the
financial world. Visit our website for a free one month trial.
Bloomberg’s new Private Equity newsletter publishes active
intelligence unavailable elsewhere on funds in the market and
limited partners with capital to commit. From breaking news on
internal maneuvers of venture-capital and buyout funds, to
exclusive analysis and commentary on big-picture issues, this
weekly newsletter uses proprietary Bloomberg data to provide
you with the information you need to respond to new risks and
make the most of new opportunities.
Visit Bloombergbriefs.com to sign up for a risk free
trial. Or contact Annie at: agustavson@bloomberg.net
Tel: +1 212-617-0544
Bloomberg BRIEF is a new publishing division of Bloomberg L.P. focused on high quality,
electronic newsletter products, providing unique data, commentary and analysis from
–
the premier source of data and analytics in the financial world.
With dedicated global teams of economists, proprietary Bloomberg data and senior
editors dedicated to each title, our newsletters consistently publish superior
commentary, news and analysis you simply will not find anywhere else.
For a full list of our 19 titles please visit bloombergbriefs.com
1 2 3 4 5 6