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The Velvet Rope of Private Equity Opens For Retail Investors

May 2, 2014 Blog

The Nasdaq Stock Market is expected to open the velvet rope of the exclusive Private Equity VIP room to retail investors.

In the near future, Mom and Pop investors can turn their hard earned retirement savings over to the big boys at the Carlyle Group, Blackstone and KKR hoping that they can earn the big returns on their savings.

Mainstreaming the once exclusive private equity club is yet another indication that Wall Street is successfully pushing high risk alternative investment products that often lack liquidity on Mom and Pop investors. The problem is, Mom and Pop, along with many of their financial advisors, commonly don’t understand such products and their attendant risks.

“One of Wall Street’s most exclusive investment products is inching toward the mainstream,” reported William Alden of the New York Times.

“Private equity funds — vast pools of capital that buy and sell entire companies — may become more accessible to smaller investors under a plan being contemplated by the company that runs the Nasdaq stock exchange, a person briefed on the matter said on Friday,” according to Alden. “The plan, still in its preliminary stages, envisions a market where investors in private equity funds can sell their stakes to individuals whose net worth falls far below the usual threshold for such investments.”

I simply can’t see how this is such a good idea for mainstream investors.

Most brokers peddling these exclusive investments are unlikely to make investors aware of the highly risky nature of these speculative bets.

The risk disclosures of these offerings are thin and most investors will not be told that the failure rate for private deals is high and the promised returns do not often materialize.

There was a sound reason that these deals used to be the exclusive province of the rich and famous– they could afford to lose the money invested. For most investors saving for retirement, this is irreplaceable money.

Even the financial services industry thinks that mainstreaming private equity is a bad idea.

On Saturday, Bloomberg reported one financial services CEO’s disbelief and dismay at the proposal. “Private equity funds are probably too complicated for the average investor’s retirement account, according to Principal Financial Group Inc., which provides the plans to 3.8 million people,” reported Bloomberg’s Zachary Tracer.

“’When people start talking about ETFs and liquid alts and private equity and all of that stuff, I too chuckle a little bit,’ Principal Chief Executive Officer Larry Zimpleman said on a conference call Friday in response to a question about including exchange-traded funds and other options in 401(k) plans. ‘It’s really hard to see how that is something that can be easily explained,’” Tracer reported.

Watch out, Mom and Pop. The giddy exuberance most savers may feel at being admitted to the Private Equity VIP club will likely turn into regret. Main Street will rue the day they decided to flee quarter slot machines and place their bets at the Big Boys’ black jack table.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.