Private equity wants the $12 trillion Americans have stashed in their 401(k) plans. A study says the upside temptation might not be worth the risk.

• Private equity firms are having trouble obtaining new capital from institutional investors, but Americans have $12 trillion in 401(k)s and similar retirement plans. Amid a strong lobbying push from the industry, however, skeptical academics like Jeffrey Hooke at Johns Hopkins argue returns from these funds’ risky and highly illiquid investments are often not all they’re cracked up to be.

Private equity has its eyes set on a $12 trillion frontier: retirement plans. The promise of outsized returns has lured pension funds, the ultra-rich, and other big institutional investors for decades, but new research from Johns Hopkins warns the private markets aren’t a good fit for the savings of ordinary Americans.

Jeffrey Hooke, a senior finance lecturer at the university’s Carey Business School, has long argued PE returns are often not all they’re cracked up to be. His latest study examining 19 of the industry’s top 25 firms, including KKR, Blackstone, and Apollo, finds just under half of the fund groups in question have meaningfully outperformed the stock market since being launched from 2007 to 2020. Even though investors typically must lock up their money for more than a decade, Hooke argues due diligence is usually cursory, enabling fund managers to attract capital without a track record of true performance.

“The fees are rather opaque, and there’s virtually no regulation in the business,” Hooke, formerly the principal investment officer of the World Bank’s International Finance Corporation, told Fortune. “The SEC has adopted a hands-off policy.”

“Other than that,” the former investment banker and PE director added, “it’s a perfect compliment to your 401(k).”

Many of those concerns about the industry’s lack of transparency are valid, said Kyle Walters, a private equity analyst at research and data firm PitchBook.

“That’s more something that a lot of LPs have just come to terms with,” he said, referring to “limited partners,” or investors in PE funds.

To be sure, regulators stepped up their scrutiny of private equity following the 2010 Dodd-Frank Act, which required most fund managers with over $150 million in assets to register with the Securities and Exchange Commission. The agency’s office of compliance, inspections, and examinations launched an enforcement sweep in 2012, which resulted in penalties levied against firms such as Blackstone, KKR, Lincolnshire, and Fenway Partners.

Private equity hunts for new capital   

The amount of assets managed by the private markets more than doubled from nearly $10 trillion in 2012 to over $24 trillion by the end of 2023, according to Ernst & Young, and many institutional investors with long-term time horizons have come to view PE as a natural fit. It makes up nearly half of the University of Notre Dame’s $20 billion endowment, for example, while public equities account for just over a quarter of the portfolio. The country’s largest pension fund, the California Public Employees Retirement System, or CalPERS, has over 18% of its assets in private equity and debt.

But private equity has bled that well relatively dry, Walters noted, making raising new funds much more challenging in recent years.

“The only option is to kind of reach out to a new channel,” Walters said.

That’s where the more than 120 million participants in employer-based defined contribution plans, most prominently 401(k)s, and their $12 trillion come in. Add in individual retirement accounts, or IRAs, and other savings, and total U.S. retirement assets exceed $40 trillion.

The PE industry made some headway accessing those funds by the end of the first Trump administration. As of 2020, mutual funds like so-called target-date funds, which become more conservative as investors approach retirement age, have had their private equity exposure capped at a maximum of 15%.

According to a survey from the American Retirement Association cited by Bloomberg, less than 3% of such plans make private equity investments available, however. With Trump back in the White House, the industry is preparing to lobby hard in Washington to move that number much higher.

Critics question PE performance

That push makes private equity critics like Hooke worried. He’s part of a contingent of researchers who argue the race to invest in private equity doesn’t always prove worthwhile. Since the global financial crisis, public pension plans with significant exposure to alternative assets have underperformed a simple portfolio constructed of 60% stocks and 40% bonds, according to a 2024 study from the Center for Retirement Research at Boston College.

While investors must lock up their money for years to invest in private equity, they generally can exit mutual funds, ETFs, and other common investment vehicles at any time. Hooke’s article, to be published this spring in the Journal of Alternative Investments, found that just 24 of 51 eligible funds outperformed the stock market after accounting for an illiquidity premium of 3% annually.

Pension plans and other institutions often hire third-party consultants to conduct due diligence on potential PE investments, but Hooke claims their work is often “cursory at best”—largely taking fund managers at their word when it comes to historical results and the value of assets that haven’t been sold. Meanwhile, chief investment officers at institutions, he said, have little incentive to challenge these numbers.

“They are under pressure to buy into PE funds, and, in any case, most CIOs will switch jobs by the time a fund’s results become apparent in 12–13 years, and so are happy to live with inflated net asset values (NAVs) in PE marketing documents,” Hooke writes.

But Walters noted that LPs and fund managers are typically in constant dialogue, developing relationships that span decades, so it’s not like investors are completely in the dark.

“It kind of all comes down to returns,” he said.

Still, Hooke warns LPs, never mind ordinary Americans, can’t rely on a recent track record to assess performance. In Hooke’s study, it took a median of four years for a manager to raise a “follow up” fund, even though no fund younger than 12 years was anywhere close to being fully liquidated.

Of course, investors can look further back in time, especially for firms that have been raising funds for decades, Walters noted. Also, managers will communicate with LPs if there’s an asset they want to hang on to. In other words, while existing portfolio companies may not have been sold in an eight-to-12-year-old fund, there likely isn’t any “dry powder,” or uninvested capital, sitting around.

Several money managers are telling clients they can’t expect to truly diversify their portfolio without significant exposure to private equity. As the private markets have boomed, the number of public companies in the U.S. has been halved from about 8,000 in the late 1990s to roughly 4,000 today.

“I jokingly say sometimes we levered the entire retirement of America to Nvidia’s performance,” Apollo CEO Marc Rowan said last year. “It just doesn’t seem smart. We’re going to fix this, and we are in the process of fixing it.”

Hooke acknowledges this benefit of PE. Given the higher fees and liquidity concerns, however, he is deeply skeptical most employees would get a boost in their 401(k).

“I just don’t think that person can choose funds that are going to succeed,” he said. “So you’re better off with a low-cost index fund.”

This story was originally featured on Fortune.com