By layering itself amid a mix of assets designed to be left alone for decades, private equity could operate like it always has: part of a broader asset allocation, taking more risk to chase higher returns, and left to mature in due time.

To be successful, private equity firms must convince regular investors that they’re missing out on better returns. There’s some evidence to suggest they can help. The industry has generated 13 percent annualized returns after fees over the past 25 years, according to advisory firm Cambridge Associates’ U.S. private equity index. That compares with 9.3 percent in the S&P 500 Index and 6.1 percent in the Bloomberg Barclays Government/Credit Bond Index.

“While allocating a portion of your 401(k) portfolio to private equity may not pay for beach-front property in the Hamptons, there’s more and more interest because of attractive returns in private equity and disappointing returns in other areas,” said Mitchell Tanzman, the co-CEO of Central Park Group, which allocates money for wealthy individuals to firms including Carlyle and Blackstone.

Lawsuit Fears

Some firms including New York-based KKR are hoping to score retirement money through an effort started by Pantheon Ventures, a London-based private equity firm that’s trying to get companies with 401(k)s more comfortable with the asset class. Companies are afraid of adding private equity because they can be sued by employees for offering complex products that charge higher fees.

To address the fear, Pantheon offers performance-based pricing on its fund-of-funds strategy: The firm earns a fee when performance exceeds the S&P 500 and returns money if it lags. Pantheon will mix private equity investments managed by KKR and other firms with cash and shares of an S&P 500 exchange-traded fund to offset liquidity concerns. It’s also developed a model to help value assets on a daily basis.

“Fundraising is all about knocking down barriers,” said Kevin Albert, Pantheon’s global head of business development. “They say they don’t want to invest with you because of one reason, so you fix it and keep reiterating.”

Partners Group Holding AG, a Swiss private equity firm, is also shopping a 401(k)-eligible strategy to companies. Investors get a concentrated investment in an existing Partners private equity fund with an allocation to publicly traded private-market investment firms for liquidity, according to Robert Collins, a managing director in the firm’s New York office.

Both Pantheon and Partners designed their strategies for use in target-date funds. They’ve yet to prove it works: Neither firm’s U.S. strategy has yet won money from defined-contribution plans, according to people with knowledge of the matter. KKR declined to comment on how much it expects to raise from the partnership with Pantheon.

‘Material Cost’