Private equity barons target savers in hunt for ‘the perfect bailout’

Private equity’s princelings were once swimming in cash. Pension funds and insurers clamoured to write huge cheques to plough into their supercharged funds, helping these billionaire barons cement their huge personal fortunes.

But not any more.

These self-proclaimed masters of the universe are in the throes of an unparalleled crisis, with everything heading in the wrong direction. Never before have they faced such adverse conditions. Values, exits and returns are under pressure.

With the industry in turmoil, giant institutional investors that have spent the last three decades throwing money at them are reconsidering their allegiance, creating a devastating funding drought.

Against this woeful backdrop, cash-strapped private equity firms have embarked on a frantic dash to find alternative funding – starting with unsuspecting retail investors.

“The industry wants to get its hands on the hard-earned cash in your retirement account,” Eileen Appelbaum, an economist, warned in a recent paper for the Center for Economic and Policy Research (CEPR), a Washington DC-based think tank.

A quick glance at the figures for the US explains why.

At the end of 2024, there was nearly $9tn (£6.7tn) sitting in so-called 401(k) accounts – effectively workplace or employer-sponsored pensions.

A further $17tn is sloshing around in individual retirement accounts – the American equivalent of a tax-deductible personal retirement savings account.

What’s more, this vast money-making scheme is being facilitated by the most powerful man in America – Donald Trump, the US president – following fierce lobbying by financial behemoths such as Apollo Global Management, BlackRock and Carlyle.

Trump has signed an executive order instructing Washington regulators to make it easier for roughly 90 million US savers to invest in private equity and other so-called “alternative” investments such as private credit, cryptocurrencies and infrastructure deals.

The move promises to completely reshape America’s savings landscape – and not necessarily for the better, critics say.

Money ‘drying up’

Similar initiatives are also being rolled out in the UK.

Under the government-led Mansion House accord, 17 of the largest pension providers have pledged to invest up to £50bn to private markets by the end of the decade.

The signatories include blue-chip institutions such as Aviva, Aegon, Legal & General and Nest, the government-backed workplace pension scheme.

Schroders, the 200-year-old investment house, has also teamed up with Hargreaves Lansdown, the country’s largest DIY investment site, to offer investors access to private equity through tax-efficient pensions products.

Hargreaves said it was part of the firms’ “mission to democratise investing”. One analyst called it “a watershed moment”.

Yet Jeff Hooke, a former investment banker turned academic, says the targeting of ordinary savers amounts to little more than an attempt by private equity financiers to preserve their own wealth.

“Private equity firms want more fees because that leads to higher stock prices and cash dividends for private equity management firms. If retail [investing] places just 10pc of its assets into ‘alternatives’, that equates to trillions of dollars more,” he says.

Appelbaum, from the CEPR, likens it to “the perfect bailout for the private equity billionaires” as traditional investors like pension funds turn their backs on an asset class that has flattered to deceive for far too long.

“The money… is drying up,” she says. “Private equity investors are clamouring for cash.

“In the absence of high returns together with a lack of liquidity, institutional investors have cut back on their private equity holdings and begun selling their private equity stakes.”

The Alaska Permanent Fund, the $80bn sovereign wealth fund set up in 1977 to manage state royalties earned from the mining and oil industries, was among the first to pull back after it began reducing commitments to private equity in 2022.

Marcus Frampton, its chief investment officer, said at the time that private equity was overdue “a reset”.

This month, the Alaska Retirement Management Board – which manages more than $32bn in pension plans of retired state public employees – told investors it was planning to scale back its exposure to private equity because of frustrations over liquidity.

The Teacher Retirement System of Texas, which oversees a $200bn plan, has shifted almost $10bn out of private equity into other asset classes.

In May, New York City’s pension system offloaded a $5bn package of private equity investments to industry goliath Blackstone.

The move followed a year in which returns across the five public pension funds that make up NYC’s retirement system ranged from 4.3pc to 5.4pc – far below what the public markets had generated over the same period.

Harvard, Yale and the University of California have similarly soured on the asset class and begun reducing allocations.

The buyout fraternity only has itself to blame for the retreat. Returns simply haven’t lived up to the hype, its detractors point out.

“Private equity has not beaten the S&P 500 for the last 10 to 15 years,” Hooke says.

Data from management consultants McKinsey shows that private equity returns have underperformed the index of the 500 largest companies in the US on a one, three and five-year time horizon.

A recent study by the data provider PitchBook also found that the 50 largest university endowments, which have a combined $800bn tied up in private equity assets, posted an annual return of 8.3pc over the last decade.

Meanwhile, a plain vanilla 60-40 (60pc stocks, 40pc bonds) Vanguard mutual fund returned 8.38pc over the same period.

Part of the problem is that private equity has been suffering from a prolonged logjam, made more acute by months of market volatility caused by Trump’s trade tariffs and fears of an artificial intelligence (AI) bubble.

After a bumper 2021, there was a sharp fall in dealmaking triggered by a spike in interest rates.

Between late 2022 and 2023, the value of deals plunged 60pc and the number of companies bought and sold tumbled by over a third, a report by Bain Capital found.

“These declines in activity have had a chilling effect on fundraising,” Bain said.

Raising new capital “has been difficult for all but the biggest and best-known” firms, Appelbaum admits.

In the first three quarters of 2024, just six asset managers – Apollo, Blackstone, Ares Management, KKR, Carlyle and Brookfield Asset Management – were responsible for nearly 60pc of the industry’s total fundraising, according to data provider Preqin.

Meanwhile, firms are sitting on a record 29,000 companies worth $3.6tn, half of which they have owned for five years or more, said Hugh MacArthur, Bain’s chairman, earlier this year.

The next financial crisis?

Appelbaum says many of the companies owned by private equity are simply overvalued, which has “driven a wedge between buyers and sellers”.

It has left the amount of “dry powder” – money to invest in new deals – relative to the amount they have locked up in unsold companies at a record low, according to ratings agency Moody’s.

Amid this crunch, even some private equity executives are sounding the alarm.

Orlando Bravo, the co-founder of buyout firm Thoma Bravo, has raised the possibility of retirement accounts effectively becoming a dumping ground for “companies that people cannot sell”.

Robert Morris, founder of US private equity group Olympus Partners, recently issued what might be the starkest warning yet. In a letter to investors last month, Morris said the “projected rate of return” is “unlikely to exceed that of an equity index fund” because of “the multiple layers of fees” in private equity funds.

With savers exposed to “ample dollops of additional risk” at the same time, “the 401(k) scheme bodes to be the successor to the 2008 mortgage crisis”, he warned.

Michael Moore, chief executive of the British Venture Capital Association, says: “The private capital model is tried and tested, and has been an important part of the UK economy for over 40 years, showing its resilience through different economic cycles.

“Over the long term, private capital offers a compelling proposition, delivering strong returns for investors while growing the economy by providing patient capital to 13,000 businesses across the UK.”