Private equity in your 401(k): Who is the big winner? Probably not you.

By Brett Arends

If somebody has discovered the holy grail, why would they cut in schmucks like you and me?

Private-equity skeptics include Warren Buffett.

Oh, what a tragedy!

Millions of investors were hoping that private equity was going to rescue their retirement savings and let them retire early, rich and happy.

Bummer.

A recent study of the investment performance of individuals who had invested in private-equity funds found that, tragically and to the shock of everyone involved, if anyone made out like a bandit from this industry, it was the investors who were already rich.

Either they got into the best funds, or they had the best advisers, or both.

"The most affluent investors outperform the least affluent by six to 10 percentage points in public market equivalent," report finance professors Cynthia Balloch of the London School of Economics, Federico Mainardi of the University of Chicago, Sangmin Oh of Columbia University and Petra Vokata of Ohio State University.

They looked at the cases of nearly 18,000 high-net-worth individuals, who had invested in 4,500 funds between 2000 and 2020. Those at the very top, with more than $100 million to invest, fared really well. Those with $3 million or less: not so much.

It's not that those at the bottom did especially badly. It's still an open question whether they would have done any better (or worse) if they'd just stuck to regular investing in the regular stock markets using mutual funds. They just didn't do particularly well. All the big money being made by investors in private-equity funds? It pretty much went to those with the big money, and the connections, and the access.

Which shouldn't be a surprise, when you think about it. If somebody has discovered the holy grail, why would they cut in schmucks like you and me, anyway?

It's yet another downer following last month's thrilling news that President Donald Trump is opening up 401(k) plans to private-equity honchos.

Apparently many savers are excited by the prospect. Nearly half said they'd be willing to invest in these funds in their 401(k), according to a recent survey by investment bank Schroders. Willing investors made up 45% of those polled, up from 36% a year ago.

But the recent research isn't the only rain on this parade. The greatest investor in history has also given private-equity investing short shrift.

Megabillionaire Warren Buffett was asked about private-equity investing at the annual general meeting of his Berkshire Hathaway conglomerate six years ago.

His response? "I would not get excited about so-called alternative investments," he told a shareholder who asked him about the topic. The fees were too high. The accounting was in many cases misleading or worse. And, maybe worst of all, the industry dynamics had completely changed from the heyday of private equity in the 1980s and 1990s. By now, Buffett pointed out, private-equity managers overall are handling far too much money for them to be able to invest it all efficiently.

"There's probably at least $1 trillion committed to ... buying businesses, and if you figure they're going to leverage them, you know, 2 for 1 on that, you may have $3 trillion of buying power trying to buy businesses," he said. Meanwhile the entire U.S. market was only valued at about $30 trillion, and much of that wasn't for sale. "The supply-demand situation for buying businesses privately and leveraging them up has changed dramatically from what it was 10 or 20 years ago," he said.

Actually, in 2025 there is now more than $3 trillion in private-equity funds. With similar leverage, that gives the industry $9 trillion of buying power.

Meanwhile the U.S. stock market is now valued at about $62 trillion. A third of that is accounted for just by the top 10 behemoths - companies including Buffett's Berkshire (BRK. A) itself ($1.1 trillion), plus Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) and the like. None of those, presumably, are for sale. So the amount of stocks available for private equity to buy is limited.

It's not really a great mystery how private equity supposedly "outperformed" regular stocks in past decades. Private-equity managers buy businesses with borrowed money. So long as the returns on those businesses are higher than the interest rates they pay on the borrowed money, it's easy.

Since the mid-1990s, the interest rate on BAA-rated corporate bonds has been 6% a year. The rate of return on the S&P 500: 12% a year.

This is a great game, especially if you can use, or abuse, the bankruptcy laws to shield yourself from the inevitable when the game suddenly goes against you - as it does when stocks plunge and interest rates soar.

Meanwhile, if 401(k) funds are being opened up to private equity, and investors around the U.S. are going to throw a ton of money at the industry, the logical way for the public to profit from the bet is to buy small and midsize U.S. stocks through regular low-cost index funds. Those are the stocks that these private-equity managers will end up having to chase.

-Brett Arends

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-14-25 1938ET