NK: The examples you cite of regulations intended to protect the public and taxpayers have one important thing in common: They apply to everyone equally. Everyone must have a license to drive a car - and for good reason. Rules that are arbitrarily applied eventually lose their legitimacy. That includes financial regulation.
Securities laws that discriminate against ordinary investors are indeed arbitrary. Can we credibly say that ordinary investors pose a greater risk to themselves or taxpayers than “sophisticated” investors after the savviest operators on Wall Street nearly brought down the financial system in 2008? And that’s just the latest example. History is filled with the financial foibles of high-powered investors.
Or consider 401(k) plans. Many are stuffed with expensive, actively managed mutual funds that undermine the retirement prospects of ordinary investors. Why should they be permitted while private equity is banned? One can imagine a modest allocation to private assets within target-date funds that aids diversification but doesn’t meaningfully increase cost. Vanguard Group, which famously pioneered low-cost index funds and whose target-date funds are commonly found in 401(k) plans, recently announced that it will offer private equity to eligible investors to boost diversification.
But perhaps the best reason to give everyone equal access to markets is that exclusions are self-defeating. Keeping investors in the dark makes them more vulnerable, not less. The most effective way to protect investors is to educate them, and exposure is the best teacher. Equal access to markets is the most principled and effective way to protect the integrity of regulation and markets, as well as the well-being of investors.
BR: Quick history lesson: Famed Yale University endowment manager David Swensen was the first large institutional fund manager to identify alternatives as containing enormous potential in the 1990s. He expanded Yale’s portfolio into hedge funds, private equity, commodities and real estate when practically no one else was. Yale’s endowment was the beneficiary of all that low hanging fruit.
But that was 30 plus years ago, when there merely dozens of private equity firms. Today, there are almost 8,000 PE and/or buy out firms. It has become a crowded trade. Best of luck picking out one that is going to be winner, net of fees.
And private equity funds are not registered with the SEC. They are not transparent, they do not disclose many details and numerous analysts have raised issues with how they report profits. Not only is it a crowded trade, it’s almost impossible to select from the sheer numbers of funds. And, for the most part, they are expensive and often under-performing. Where do I sign up?
Another reminder: Investors have stunk up the joint selecting actively managed mutual funds for more than half a century, despite overwhelming evidence they were hurting performance. But it wasn’t a flash of insight or academic understanding that led so many investors to go into passive funds – it was all of the scandals and crashes. The analyst research scandal, the accounting scandals, the IPO spinning scandal, the mutual fund market timing scandal, then the dot-com bust, real estate crash and Great Financial Crisis.
Mom & pop figured out this was a giant grift, so they took their ball and went home, and by ball I mean money and by home I mean Malvern, Pennsylvania, home to Vanguard.
The entire alternative investing space has been hungrily eyeing the retail retirement space, allowing investors to choose private equity funds like they were mutual funds. Sort of like the 1990s, only much more expensive. No thanks.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.