Private Equity Is No Place for Your Nest Egg

Retirement is expensive. If you’re lucky, yours will last a few decades, and you’ll be earning no or very little income. So if you want to have enough money when you retire, you basically have three options: Save more, take more risk with your investments, or work longer.

Many people find the first and third options undesirable or impossible. That leaves the second option. And despite what people such as Marc Rowan might lead you to believe, there’s really no way to get a higher return without taking more risk.

Rowan, the CEO of Apollo Global Management, wants to allow Americans to invest more of their retirement money in private assets — credit and equity that aren’t sold in public markets. The practice, as he points out, is allowed in Australia, which is so pleased with its success that it plans to double its exposure to private equity in some accounts. The UK is also considering increasing its exposure for its retirement savers. In the US, however, only accredited (read: wealthy) investors have direct access to such assets.

As Rowan sees it, people invest for their retirement for the long term. One reason private assets promise a higher return is they are less liquid. If you give your money to a private equity fund, it invests in assets that aren’t publicly traded, so you can’t sell them if you need to. After several years, the fund matures, and you get your money back with some return.

In theory at least, you have been compensated for giving up liquidity with a higher return. If you don’t need liquidity — like most retirement savers, Rowan argues — you may as well get that illiquidity premium.

Rowan is correct that public assets aren’t as safe as many people think (GameStop, anyone?), and private assets aren’t as risky. But that doesn’t mean private assets are safe — especially for inexperienced people investing for their retirement. A comparable public asset is less risky not only because it is more liquid, but also because it is more transparent. It is subject to more regulatory scrutiny and carries a market price, which conveys a lot of information about its present and future value and imposes more accountability on corporations.