Private Equity Wants Your 401(k)

The first-principles theory of a lot of private investments goes roughly like this:

Actually I guess only the first five bullet points on that list are part of the first-principles theory of private investments. The seventh is not a necessary part of that theory, and you could imagine someone starting a private equity fund and charging very low fees. But it does seem reasonable to expect private investments to have structurally higher fees than public ones. For one thing, “buy all the stocks” is an approach to public investing that (1) compares favorably to many other approaches (like “buy only the good stocks”) and (2) can be done very, very cheaply. So if you launch a business like “I will invest in big public stocks and charge 2% of assets,” your competitors will charge less for a better product and you will not raise a lot of money. Whereas there is probably no similarly simple low-barriers-to-entry way to do private-market investing,2 and the actual work of private investing — finding the right opportunities, doing due diligence without public financials, building relationships with companies, getting involved in operations, etc. — just does seem more labor-intensive than picking public stocks. There are a lot of retail hobbyist stock traders; there are fewer retail hobbyist leveraged buyout sponsors.3