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Will Private Equity Firms Fuel the Next Wave of 401(k) Investments?

Will 401(k) plans become an important market for private equity and buyout firms like KKR? Recent reports in the business press, like Forbes and the Wall Street Journal, indicate that the possibility seems increasingly likely. While pension plans have traditionally invested in these types of funds and continue to do so, that pool may be drying up as firms like KKR eye DC plans — as well as the retail funds and ETF market, which McKinsey estimates will top $13 trillion by 2015.

DC plan sponsors and advisors have been reluctant to expose participants to alternative investments unless they’re part of an asset allocation fund, but that could change. KKR’s global strategy fund requires only a $2,500 investment and their distressed debt fund requires $25,000 — a far cry from the $10 million threshold for qualified investors to invest in their traditional funds.

Private equity is relatively new territory for a firm that built its brand on buyouts, but today more than one-third of the $74 billion under management falls in that category. The challenges for firms like KKR are distribution and brand — will advisors be receptive, and can KKR overcome their “barbarian” reputation earned in the rough-and-tumble world of hostile takeovers? Advisors looking for a new story may be wise to pay attention to this potential phenomenon.

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