President Trump has signed an order to ‘democratise’ investment in private assets for 401(k) investors.¹ In essence, this gives the Secretary for Labor nearly six months to propose a framework — from asset allocation to fiduciary guidelines — for 401(k)-holding households to invest in alternative assets (defined as venture, private equity, private credit, commodities, real estate and digital assets).

In many respects this move makes sense – in the US alone, the private economy accounts for over two-thirds of employment and capital investment. According to Apollo, 87% of firms with revenues greater than $100 million are private.² Allowing households to access investments in the alternative space should aid diversification and provide alternative channels for capital at a time when public market valuations in the US are close to all-time highs.³ In addition, capital flows from the private sector will also help to support innovation and job creation.

Promising return profile

More importantly, the move should give households access to a set of assets with a very promising return profile — our analysis, using Pitchbook Capital Indices, shows that the compound annual growth rate on North American private equity assets since 2000 is 12.8%. We also note that the forward-looking capital market assumptions for many large financial institutions point towards private equity outperforming US equities by several percentage points annually in the next five to ten years.⁴ Working this into a portfolio context, in a recent note we highlighted that private assets can make up 15% of an individual’s portfolio, and more than that for family offices with an appetite for illiquidity.

Wealthy Americans are already exposed to private assets, and as is now well known, university endowments in the US have done very well from their significant allocations to private equity (‘the Yale model’) in the last thirty years.

The US move comes as policymakers in the UK are beginning to rethink ISAs,⁵ to propose that pension funds have access to private investments, and as the debate on the Savings and Investment Union (SIU) in the eurozone gathers pace.⁶

Access to the best funds is critical

Collectively, these trends point towards greater access to private assets. However, the note of caution we strike is that, in the context of a very broad dispersion of returns across private investments,⁷ households must have a means of accessing the very best rather than mediocre funds. Our experience at Moonfare is that only a very thorough investment process will uncover persistently excellent managers, around whom households and family offices can build a private asset portfolio.