Private Equity Experience

Private Equity in 401(k)s: A Risky Bet or a Game-Changer?

• Emily Sander • Season 1 • Episode 17

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Tune in to the Private Equity Experience Podcast as we dive into the increasingly controversial topic of private equity making its way into 401(k) retirement accounts. This episode explores the latest developments, including Senator Warren's strong concerns and the potential risks associated with adding illiquid and volatile assets to employee retirement savings.

Key Takeaways:
Senator Warren's Stance: We discuss Senator Warren's critical letter to Empower, highlighting concerns about transparency, high fees, and liquidity risks associated with private equity offerings in managed 401(k) accounts.

The Allure & Risks of Private Equity: Experts Ed Barton and Rory Liehert break down the potential benefits for sponsors seeking to diversify, but also emphasize the significant downsides of private equity – including long lock-up periods, market volatility, and the lack of readily available liquidity.

Dilution in Retirement Savings: We examine how the introduction of private equity could impact the overall diversification and potentially the returns of 401(k) portfolios, especially for average investors.

The Evolution of Private Equity in Retirement: This episode traces the roots of this trend back to Donald Trump's early advocacy and analyzes the current push by organizations like Empower.

Risk Assessment: Private Equity vs. AI Portfolio Management: A lively debate ensues on whether allocating private equity to 401(k)s poses a greater risk than relying on AI-driven portfolio management.

Is This the Right Asset Class? We delve into the fundamental question of whether private equity aligns with the goals and risk tolerance of the average 401(k) participant.

#privateequity #401k #retirementplanning #investments #funding #dilution #fees #liquidity #risks #illiquidassets #senatorwarren #empower #privateequityin401k #financialplanning #assetallocation #marketvolatility

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Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).

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emily-sander_1_07-15-2025_160440:

Senator Warren pushes back on private equity and 4 0 1 Ks. Here's what's happening. Empower retirement, A major 401k record keeper serving about 90,000 employers, has proposed offering private equity, private credit, and private real estate as options within participant accounts, but only for those in managed accounts with professional oversight. Senator Warren, ranking member of the Senate Banking Committee fired off appointed letter to Empower CEO raising concerns about one, lack of transparency in private funds, two high and opaque fee structures, and three liquidity risks If investors wanna exit when the markets turn. Ed and Rory, what are your hot takes?

ed--hizzz-_1_07-15-2025_160439:

I, uh, I will give you my, my commentary I made before we started the pod, which was. This is probably the first time in my professional career. I agree with Elizabeth Warren on anything

rory-liebhart_1_07-15-2025_160439:

Yeah. Mm-hmm.

ed--hizzz-_1_07-15-2025_160439:

I, I am, I am. Absolutely. After everything we've discussed around private equity, I think the thought process of going to a pure or a true private equity type asset, where it has long hold periods. Illiquidity volatility in pricing. The, the market is inefficient. The, you know, that's just not, that's just not where I think the average Joe, regardless of how professional their portfolio's managed, um, should be having their retirement funds at least at, you know, I think there's, there's gotta be a lot of controls around it, and I think her admonition to go back and try again is a, is a good one.

rory-liebhart_1_07-15-2025_160439:

Yeah,

emily-sander_1_07-15-2025_160440:

Rory.

rory-liebhart_1_07-15-2025_160439:

I, I, I generally agree with that. Um, you know, it's, this stands to reason that this is what we're talking about here is a$38 trillion pocket of, of assets that are being managed. So, of course. You know, um, for some stakeholders involved, you know, having access to that, to put your offerings out there is enticing, you know, for so many reasons. where I, where I generally agree with Ed is I don't think that this is necessarily the. Right kind of asset class for a 401k. Um, you know, kind of where, as you said, you know, average Joe's, that's where they accumulate their retirement. So, you know, the potential for swings in that has a lot of implications. And, and that's not to say that there aren't other ways that. Private investors can get involved with private equity. This is a whole nother ball game. I mean,

ed--hizzz-_1_07-15-2025_160439:

Oh yeah.

rory-liebhart_1_07-15-2025_160439:

take it away from 401k. There's self-directed IRAs. I've invested in private equity out of my own self-directed IRAs, so it's not like this is the only game in town to invest in, in, uh, private equity. But, um. I think that this is just naturally one of those elements that comes up, you know, with, the current administration. I think this, this whole topic was really actually introduced by Donald Trump back in 2020. I learned. Um, and so it's kind of rep percolated again. Uh, and so now it's getting some fresh debate around all things Ed talked about, which is, you know, um, access to information, long, long hold periods, fees, all this stuff that. You know, I think, um, is worth, worth a debate. So where it's at right now is, there's a debate going on between led by Elizabeth Warren, but you know, with, with others involved. And I think that's what needs to happen. I think, um, you know, it's not just a easy answer. You know, kind of reminds me of people wanting to do away with like social security. Hey, I can manage my own investments just fine. I'm a, you know. You know, individual that can make strong choices. Yeah. Well, I mean, markets also matter too. So, um, anyway, lots to talk about, lots to unpack, but that's my

emily-sander_1_07-15-2025_160440:

Yeah, I mean this was, this was from a article that you brought to the table, Rory. So this is, this is literally in the news and I was trying to think of. An analogy and it, it was, it's kind of like an amusement park where you have like public markets, like, I don't know, stocks and bonds or like your vanilla rides or like the standard rides like the Ferris wheel and the bumper cars or whatever. They're predictable. You can get on and get off and then imagine there's like this gated part of the amusement park that's now been opened and it's like private equity land and you can go on high speed rollercoasters and you can have big thrills and big risks, but. It's been closed off unless you've been institutional money or like very high net worth individuals. And now Empower wants to open those gates, but have like the safety checks been done and are all the height requirements to point and all those things. So like Elizabeth Warren is saying like, are you sure that you, this is ready for prime time? Can regular folks really handle this? Average Joes really handle this. So,

rory-liebhart_1_07-15-2025_160439:

Yeah,

emily-sander_1_07-15-2025_160440:

um.

rory-liebhart_1_07-15-2025_160439:

not, I would say actually, uh, most likely not. Um, yeah, for, for all, all those. Thing. Things you might just generally think about is, you know, you can make a case for giving average Joe a shot at diversification Alternative asset classes. As we talk about in our book, and we've talked on this podcast, it's, it's a legitimate asset class, but it comes with its own characteristics. So a lot of times you like to hear in. The proponents for these things are saying, you know, well, higher, higher return potential than your, you know, 7% con compounded average s and p 500 returns, or whatever that is over time. Yeah, here's an opportunity to make, you know, 15, 20%, but then start digging under the hood of what that means is, you know, that comes with more risk and is the goal of a 401k plan to be administered to provide. You know, plan participants with highest possible return or give'em the best shot at, you know, having a nest egg for retirement. I think that's probably where, know, uh, the, the overall critics of something like this would come from.

ed--hizzz-_1_07-15-2025_160439:

Well, and I, and I would go, uh, I'd go a step further. I think it's a, there's an, and both here. so when you look at, um, alternative asset classes in general, all the concerns around illiquidity and lack of diversification and, you know, the, the cost to administer and all those elements. And so a direct investment from a 401k into, know, a, a, a. Direct fund is probably not the way to go. Now, what I would say is, you know, I, I would say the same thing about someone going, well, we're gonna put, you know, apartment complexes in our 401k, or we're gonna put,

rory-liebhart_1_07-15-2025_160439:

Yeah.

ed--hizzz-_1_07-15-2025_160439:

but what I would say is, you can get there, but the, it's, it's like using the ETF version

rory-liebhart_1_07-15-2025_160439:

Yeah.

ed--hizzz-_1_07-15-2025_160439:

you can use

emily-sander_1_07-15-2025_160440:

Oh

ed--hizzz-_1_07-15-2025_160439:

to make your,

emily-sander_1_07-15-2025_160440:

yeah.

ed--hizzz-_1_07-15-2025_160439:

to make your investments into real estate. If you wanna have real estate in your 401k. So there's normally a, a good diversified 401k will have a REIT option. And you know what I would say is a, is a potential, and I even say self-directed IRAs and things like that. There's a, there's a risk level there for illiquidity that's structured you want exposure to, to private equity. And you don't want to have the downside of illiquidity. There's, you can. Buy stock in KKR. You could buy stock in BlackRock.

rory-liebhart_1_07-15-2025_160439:

That's

ed--hizzz-_1_07-15-2025_160439:

So you can invest in the, in the GP essentially, and get the same ride. And I, so in prep for this, I pulled up those 2K KR, and Blackstone. So five year return on Blackstone stock Liquid could buy it today, sell it tomorrow, do all the things you, you wanna do. Five year return on Blackstone, 185.5%. Five-year return on KKR 292.25% five-year return on the s and p 593.38%. So you could get those outsized returns, you could get that diversification, you can do those kind of investments without the, the downside. Now you're not gonna get, maybe if you had gone direct, you might get another 500 basis points, but.

rory-liebhart_1_07-15-2025_160439:

Yeah.

ed--hizzz-_1_07-15-2025_160439:

For the typical investor, and I would put myself in that category'cause I don't have, you know, seven figures, eight figures to go dump into this and not think about the liquidity of that.

rory-liebhart_1_07-15-2025_160439:

Right.

ed--hizzz-_1_07-15-2025_160439:

if I was, if I was, if I wanted to make a direct investment, if I wanna make an investment in private equity, that's the direction I'm gonna go. And I get the kind of the best of both worlds. I get the liquidity of a publicly traded vehicle with. The, the return characteristics of private equity, just, you know, potentially, you know, there's gonna be more over at associated with both trading and management with those, it's almost like A-P-E-E-T-F

rory-liebhart_1_07-15-2025_160439:

Mm-hmm.

ed--hizzz-_1_07-15-2025_160439:

and you can, you can kind of pull that and it's gonna pull some of that return out, but you're gonna get the, the trade offs gonna be the liquidity and other things that I think are almost impossible to, to get if you're a direct investment in a private equity.

rory-liebhart_1_07-15-2025_160439:

I mean there's, there's plenty of ways to access private investments. So in this case, you, you just ask yourself, you know. What, what, what private investments would you, would you put in a 401k plan? Basically like anything that's not a public company is a private investment, so that could be literally anything. Uh, so, you know, I think people that are, you know, against something like this, they kind of lean on the fact that the SEC is kind of the governing body over public companies, which it is. you know, what, what, uh, measures can you put in place to make sure that the private investments that you're offering to Joe Average, you know, is, know, a legitimate offering, you know? Um, there's so much, much, it's so vast, you know, so the, the, the, the. Landscape. So how do you qualify what's, what's available? And you know, typically that'll end up go, I would think if it does go that way, I've, you know, kind of read about this, you know, Blackstone is kind of the one that's sort of put it out there, Hey, we wanna offer our funds to, you know, uh, 401k investors. And so that's how I think a lot of this got pushed up to the current is like Blackstone, you know, looking for probably, uh, distribution network for accessing$38 trillion of,

ed--hizzz-_1_07-15-2025_160439:

How do I, how do I get more, how do I get more limited partners

rory-liebhart_1_07-15-2025_160439:

exactly.

ed--hizzz-_1_07-15-2025_160439:

I can get a larger pool so I can get a bigger

rory-liebhart_1_07-15-2025_160439:

where the big guys are gonna drive it, probably, you know, anything that goes

emily-sander_1_07-15-2025_160440:

So, so that's, that's how it's f favorable to private equity, or at least that's one argument why it could be favorable to PE firms.

ed--hizzz-_1_07-15-2025_160439:

Yeah.

rory-liebhart_1_07-15-2025_160439:

Yeah. Certainly expanding the market for sure. Yeah.

ed--hizzz-_1_07-15-2025_160439:

Because they're, they're in the business of constantly, we've kind of talked about it. They're in two businesses,

rory-liebhart_1_07-15-2025_160439:

Yeah.

ed--hizzz-_1_07-15-2025_160439:

and raising capital to invest, and that's how they make

emily-sander_1_07-15-2025_160440:

Yeah.

ed--hizzz-_1_07-15-2025_160439:

And so if you all of a sudden open up a multi-trillion dollar pool of investors that can put a percentage into private equity, that's, that's pretty lucrative. Now what I, what I would say is on the 401k side, and I've, I. may have sat in one of these seats, Rory and I have multiple times. Probably half a dozen is 401k trustee. So the trustee

rory-liebhart_1_07-15-2025_160439:

yeah.

ed--hizzz-_1_07-15-2025_160439:

has a, has. So a 401k plan will have a board of trustees that are responsible for the administration of that plan, just like, it's like any other pension. So it's like a defined benefit pension where they've got trustees 4 0 1 Ks have trustees. The trustees are responsible for the compliance of that plan. As well as the investment choices. And so you normally will hire a third party administrator to assist you with the administration of your pension plan, whether it's a defined benefit or 401k, which is defined contribution plan or any of the others. And the trustees are personally liable and personally responsible for the. Fdu, they have a fiduciary duty to the beneficiaries of the trust, which are the employees. And so if you pick investments that are illiquid that, I mean were, where some of this stuff really came out was you had situations like Enron,

emily-sander_1_07-15-2025_160440:

Yeah.

ed--hizzz-_1_07-15-2025_160439:

to remember because they were one of my largest clients back in 2000, um, where if you were an Enron employee. Your company match may have been 100% in Enron stock,

emily-sander_1_07-15-2025_160440:

Oh.

rory-liebhart_1_07-15-2025_160439:

yeah.

ed--hizzz-_1_07-15-2025_160439:

and you were encouraged to get put Enron stock in your 401k because they would get a discount on a purchase. Well, folks had 4 0 1 Ks that were, and then they boom blow up and there the trustees got sued they didn't offer sufficient diversification to the. To the employees in the 401k plan to ensure that they were able to of spread out their wealth. The second piece of this is the employer has a, an affirmative obligation to ensure that the employees, they're considered to be unsophisticated investors, so normally. When you've got a four, when you've got a, a private equity or you've got a real estate and it's illiquid, non-publicly traded, you have to be an accredited investor in order to be able to make those investments, which means, you know, the government says, SEC says, well, you're at least rich enough to be stupid. And so, know, you, you can, you've got enough wealth that you, that we assume you can make intelligent. Decisions, and therefore, oh yeah, I, I'm right with you. But, but you know, they go, you know, so you can, but you have to be an accredited investor to invest in this stuff. Well, the 401k is assumed that everybody is an unaccredited investor, does not have the knowledge to understand how to diversify, does not understand things like risk premium does not understand things like. and you know how to put a, a well balanced portfolio together. And so the employer has an affirmative duty to provide that level of, to provide education around that and to provide enough choices so that the employee can have a well diversified portfolio. as a result, you know this, this could. doesn't mean that I, stupid Ed can't go a hundred percent into private equity and that would be a problem and that could be a problem for the trustees as well.

emily-sander_1_07-15-2025_160440:

What do you make of the proposed managed account model?

rory-liebhart_1_07-15-2025_160439:

As, as far as limiting it only to those accounts that are professionally managed, I think, think there's, I think there's, I think that's a step in the right direction. I also think that if this were to pro proceed. You know, the way it's considered is like, uh, plan sponsors can choose whether to include private equity or not, that there's not a mandate to do that. Of course. That being said, who stands to benefit from all this? You know, yes. The, the plan sponsor can make the decision, but, you know, plan administrators probably gonna have an incentive to push it on you and, you know, kind of offer it. And that goes all the way up the chain. Right. You know, so there's that, there's that element. But, um. I think those are, those are reasonable steps to take if you're gonna go down this path, you know? But what does managed account really mean? Do you have to have a certain level of wealth to qualify, or is that could be a account managed by some hack out there that doesn't know what they're doing, you know,

emily-sander_1_07-15-2025_160440:

Hmm.

rory-liebhart_1_07-15-2025_160439:

yeah. Um, it, it is interesting, you know, it's like, well if, uh, if something like this then becomes available. know, uh, the other side of the coin is hedge funds, you know, so like what if somebody wants some sort of event driven hedge funds and such to be included in 4 0 1 Ks, or, know, uh, something really esoteric and even like crypto related investments are now being. Ba bandied about is like, Hey, why I wanna be able to in this from a tax deferred account, et cetera. Um, I don't know. There's, this is just one, you know, one element under consideration. So, um, what I want is, I want people to, you know, kind of, that aren't professional investors. And our investing their earned money in an investment strategy, I want them to have the best shot at retaining that 40 years from that point in time where they can actually utilize it in retirement. Not to say that the bottom of the market couldn't fall out right when you're ready to retire and you're screwed. But you know, I think just keep coming back to, um, you know, the risk return profiles. You know, and alternative asset classes is different than publicly traded equities for many reasons. So.

emily-sander_1_07-15-2025_160440:

Hypothetically, if this went through, what would that do for PE firms? Would they have to change their stance or change how they operate? Or would some shrug their shoulders and be like, okay, that's now a thing.

ed--hizzz-_1_07-15-2025_160439:

I

emily-sander_1_07-15-2025_160440:

I'm gonna go on my way.

ed--hizzz-_1_07-15-2025_160439:

see. I think you would see some private equity firms go, okay, we're gonna embrace this model'cause there is a lot of capital and we're gonna have to develop an LP model that is really driven by essentially a second level institutional investor. And I'm just trying to, trying to picture how this would work in practice.

rory-liebhart_1_07-15-2025_160439:

like fees would be pushed down somehow.

ed--hizzz-_1_07-15-2025_160439:

Yeah.

rory-liebhart_1_07-15-2025_160439:

it would be less, less scarcity value to it. Um, you know, so the two and 20 model, quote unquote might, might change a

ed--hizzz-_1_07-15-2025_160439:

This is already, which is already under pressure anyway.

rory-liebhart_1_07-15-2025_160439:

Exactly.

ed--hizzz-_1_07-15-2025_160439:

I think it's, I, I think the other, the other side of this is, you know, for retirees, and this, again, I get, I'm, this is the closest thing I get to Elizabeth Warren that you're ever gonna see is I'd be one that goes, look, if you wanna have private equity in, in retirement funds, that's fine, but it is gotta look like this. The only choices you have are target date retirement funds. That are well diversified for portfolios. They have a mix of, of domestic, international, fixed income, alternative asset and equities. They're managed by professionals. The underlying elements are ETFs and you retiree or potential retiree are basically going to be invested in the markets with a well diversified portfolio. And you don't get to trade in and out. You don't get to change, you know, basically the allocations being mathematically driven,

rory-liebhart_1_07-15-2025_160439:

Right.

ed--hizzz-_1_07-15-2025_160439:

passively managed, and it's just going to kind of take you to a 2040 target retirement date. That's my 2040 target retirement fund. It's actively managed based upon kind, risk, return, and timelines to be able to optimize. I, I get very concerned around the, typical. I don't even wanna say it's a typical American. I think as a typical person wants to go, I, I, I know better when they don't. an investor when you're not, and I can make a bazillion dollars and therefore I'm gonna roll the, I'm putting it all on, you know, double zero black and put all the chips there and it's gonna hit maybe and it doesn't. And so with retirement funds, whether it's IRAs, 4 0 1 Ks. Pension plans. The thing is that, like an employer pension plan, a defined benefit plan is governed by the government as to like the

rory-liebhart_1_07-15-2025_160439:

Larissa.

ed--hizzz-_1_07-15-2025_160439:

how diversified it has to be, how liquid it has to be. What, how the, the actuarial assumptions behind the, the, and they have to time their, basically, time their, uh, their, payments such that it's liquid enough to be able to meet pension obligation. You don't have that in your 401k.

rory-liebhart_1_07-15-2025_160439:

no.

ed--hizzz-_1_07-15-2025_160439:

So I'm like, okay, if you're gonna do this, if you're gonna open up this a the asset classes, then you've gotta start putting some of those same restrictions.'cause some of the biggest investors in private equity are pension funds, but they have all these other regulations around'em to protect the beneficiaries. I think if you're gonna do that in 401k, it goes the same direction where you go Look, the beneficiary of a pension defined benefit pension doesn't get to choose their investments. you don't either. It's just a self self-funded plan.

emily-sander_1_07-15-2025_160440:

How would this affect the other LPs, the traditional LPs that exist today?

ed--hizzz-_1_07-15-2025_160439:

I, I think it makes, here's where I think it makes it worse. There's already almost too much money chasing too few deals in private equity

emily-sander_1_07-15-2025_160440:

Hmm.

ed--hizzz-_1_07-15-2025_160439:

now you're gonna make more money. Chase too few deals in private equity'cause there's gonna be an influx of capital, which is gonna drive prices up'cause you've got supply and demand. So it'll drive prices up on the, on the buy side, you're gonna have, you may have some good opportunities on the sell side for the existing investors, but over the long haul, you know, with additional funding, it's gonna drive some of the prices down. One of the biggest advantage of private equity the fact that they go find stuff that you can't find on the markets. know, so it's,

rory-liebhart_1_07-15-2025_160439:

exactly. Yeah.

ed--hizzz-_1_07-15-2025_160439:

and now all of a sudden you're putting all that in play for all the

emily-sander_1_07-15-2025_160440:

Yeah. Do, do either of, you know, from just a regulation or policy perspective, is this like tantamount, is this like normal course of business? This is how. Things get teed up and then they get discarded, or this one gets teed up like this and it goes through a process, or is this kind of a curve ball? What? What does that look like?

rory-liebhart_1_07-15-2025_160439:

Oh, this, this is, this is, this is normal stuff. Like I, I, I'm, you know, was actually surprised to see this pop up because I, I really, know, had figured it had been discussed and, you know, analyzed and such up to this point. So just when, just really earlier this month is really when the scuttlebutt started bubbling up. Uh, no, let's stop this type of stuff's. You know, um, really common. I mean, I'm sure even a few years ago, people were trying to talk about how do we put NFT investment opportunities into, you know, managed, self-directed, you know, and managed retirement account crap like that. It's just, there's always, there's, let's just say there's always there, um, you know, allocations of capital. Available and there's always somebody trying to match that with some other offering of sorts, and there's a lot of innovation that comes with that. But there's also a lot of red tape you have to wade through and make sure it's done. You know, uh, without damaging, damaging people involved out the gate. And so, yeah, I think crypto's gonna be a big one that's kind of here to stay. I think was sort of a flash in the pan. I mean, REITs at one point, I'm sure went through this kind of scrutiny and things like that. Oh, you're, you're, how are you going to, you know, allow somebody to invest in. As Ed said, an apartment complex in Tacoma, Washington. Uh, you know, you figure out a way to make it liquid and you make it, uh, you know, have certain SEC oversight and things like that. You know, I, I, I imagine my prediction is, you know, some version of this will, will make its way into, into the 401k, you know? Uh, yeah, yeah, I do. I think so.

emily-sander_1_07-15-2025_160440:

So, okay, so like the cynical part of me goes from what you've all just said, is there a person or like a small group of people at one big PE firm who's like, you know what, we could bring in so much more money if we did this. Why don't we pitch this as financial democratization for the people? But really we're gonna get a shit ton of money into our firm. The cynical side, is that

rory-liebhart_1_07-15-2025_160439:

Well, I think

emily-sander_1_07-15-2025_160440:

a thing?

ed--hizzz-_1_07-15-2025_160439:

One of my good friends.

rory-liebhart_1_07-15-2025_160439:

is looking for a way to access retail investors. That's, that's, that's always the case. So yeah, you might be right. There's somebody figuring out a current angle on it. Maybe, maybe with the, the tailwinds of the current administration having supported this for the last four or five years, now is the time to really make a thing of it, you know?

ed--hizzz-_1_07-15-2025_160439:

Yeah, I was gonna say, as one of my good friends, uh, Cassandra, Aurora would say, choose you can have both.

rory-liebhart_1_07-15-2025_160439:

Exactly.

ed--hizzz-_1_07-15-2025_160439:

Your cynicism is absolutely accurate. but it's, it's not necessarily a bad answer. yes, it's, we can make a ton of money and we've made this available for democratization. It's why choose, we could put both out there and that's the American way. That's capitalism.

rory-liebhart_1_07-15-2025_160439:

is.

ed--hizzz-_1_07-15-2025_160439:

That's,

rory-liebhart_1_07-15-2025_160439:

is.

ed--hizzz-_1_07-15-2025_160439:

that's capitalism.

emily-sander_1_07-15-2025_160440:

It too.

rory-liebhart_1_07-15-2025_160439:

stopping that mentality. It'll never change. Humans are humans and Yeah, I mean, and, and it's like we legislate as we go and we, you know, put forth regulations as we go and our best, but there's always gonna be, you know, ways to. Yeah. What ways for people to, to out how to make more money in sooner off of other people, so

ed--hizzz-_1_07-15-2025_160439:

I'll, I'll give a, I'll give it a, I'll give a example because I lived the example at, uh, beautiful accredited home lenders.

rory-liebhart_1_07-15-2025_160439:

yes.

ed--hizzz-_1_07-15-2025_160439:

back in, back in 2000, in the early two thousands during, in the late 1990s during the Clinton administration, they opened up, they essentially said exactly what you just said, em. with mortgages, we're gonna democratize the mortgage industry, so we're gonna

emily-sander_1_07-15-2025_160440:

Oh yeah.

ed--hizzz-_1_07-15-2025_160439:

We're gonna encourage investment into under, under invested areas. We're gonna reduce the, the underwriting criteria so that more people could buy their own homes. We're gonna really create this big, this big real estate, um, capability for people to buy homes and become, you know, permanent members of, of that neighborhood. And, you know, open up home ownership to whole groups of folks that never had it before. And there was not sufficient regulation. And so as a result, what you had was basically government incentives to go do these things. People made a ton of money.

rory-liebhart_1_07-15-2025_160439:

Oh yeah.

ed--hizzz-_1_07-15-2025_160439:

And then you had a bunch of folks go, oh, well they could make a ton of money. Let's, you know, and they took the guardrails off, let's kind of spread the, spread the whole thing out. And but the assumption from the borrower, because you're signing this form and this form and reg this and this that, and oh, the government's said this is all okay, so it's fine. And then it blows up, you know, 10 years later and they're like, well, you know, this is, I didn't understand this. Could have the same effect

rory-liebhart_1_07-15-2025_160439:

Yeah. I

emily-sander_1_07-15-2025_160440:

Hmm.

rory-liebhart_1_07-15-2025_160439:

it's, it's a

ed--hizzz-_1_07-15-2025_160439:

on retirement.

rory-liebhart_1_07-15-2025_160439:

there's, there's not, you know, unless there's, uh, know, governmental in intervention, it's always gonna be, someone's gonna win more. And somebody's gonna lose more. It's, you know, it's, that's the way it is. So you just try to mitigate that on both sides with risk management. So, you know, think there's gonna always be a way to, um, innovate, uh, ways to, you know, make more money through investment, professional investment strategies, but it's gonna come at the cost of. Some someone or some cruise group or some counterparty. That's that's for sure. So,

ed--hizzz-_1_07-15-2025_160439:

Now if you.

rory-liebhart_1_07-15-2025_160439:

government ends up stepping in is sort of buffering that to some

ed--hizzz-_1_07-15-2025_160439:

Well, and the, the other side of that is the government, whether it was a mortgage business or whether it's in retirement accounts, the, the moral hazard is the government backstops all this stuff with ERISA in that case, or with Freddie Fanny and the, you know, the,

rory-liebhart_1_07-15-2025_160439:

point.

ed--hizzz-_1_07-15-2025_160439:

and so what you've got is there's no incentive. For anybody to mitigate their risk because they know if it blows up spectacularly, the government will bail their ass out.

rory-liebhart_1_07-15-2025_160439:

It ain't

ed--hizzz-_1_07-15-2025_160439:

And so that's where, that's where I'm like, look, on the current structure for private equity, if it blows up, the government's not backstopping any of that,

rory-liebhart_1_07-15-2025_160439:

Yeah,

ed--hizzz-_1_07-15-2025_160439:

you're, you're just

rory-liebhart_1_07-15-2025_160439:

that

ed--hizzz-_1_07-15-2025_160439:

in the water

rory-liebhart_1_07-15-2025_160439:

Like

ed--hizzz-_1_07-15-2025_160439:

You lose your money. You're going

rory-liebhart_1_07-15-2025_160439:

in the territory that the big banks were in. Like they're, they're

ed--hizzz-_1_07-15-2025_160439:

too big to fail.

rory-liebhart_1_07-15-2025_160439:

I mean, that's the world we're in now. It's not just the banking sector that is too big to fail. It's the whole, economic sector, whole financial sector. It's, it's a, it's, it's actually, it's interesting how different a world it is now than it was in 2010

ed--hizzz-_1_07-15-2025_160439:

And I'll just let the folks listening know, we didn't plan this part, but we're headed down. This is kind of down a rabbit hole for another pod. Like has equity become a sector that's too big to take?

rory-liebhart_1_07-15-2025_160439:

that's a great one. Yeah, we'll

emily-sander_1_07-15-2025_160440:

If you were in,

rory-liebhart_1_07-15-2025_160439:

That's gonna be a

emily-sander_1_07-15-2025_160440:

if you were, let's, let's say hypothetical, you guys were in the government and you could make whatever regulations around this, this had to go through, you had to introduce private equity. But you could structure it and putting any regulations you wanted on it. What is the most elegant way to do that?

ed--hizzz-_1_07-15-2025_160439:

I gave, so I'm from the government. I'm here to help. That's my favorite. That goes with my Reagan Bush 84 84 bumper sticker on my new car. uh,

rory-liebhart_1_07-15-2025_160439:

well, the original,

ed--hizzz-_1_07-15-2025_160439:

I, I, I kind of laid it out. The, what I would do is go, look, you, you've gotta, it, it's gotta be part of a portfolio where the only thing you can have is a, is a target retirement, target date retirement fund. And, you know, it's, it's in there. So it's almost like a managed portfolio in a case that you know, which is part of the overarching current. Proposal except that it's even more, it's less, it's, it's more managed and the, the. The person who's making the investment, the employee making the investment, really has no control. And then it becomes a, you can't have too much concentration in any one thing. You've got the, you know, the trustees have have restrictions, so I, you know, a typical pension fund won't have more than 10% or so in alternative investments, maybe 15%. And I think you put those same pension fund, pension fund requirements. On these managed, managed retirement funds that are, you know, target date retirement funds and sitting in 4 0 1 Ks, and that probably would get me comfortable enough to, not panic, but I still hate the moral hazard of ERISA backstop and all this stuff.

rory-liebhart_1_07-15-2025_160439:

Yeah, completely agree. Yeah, I don't have much to add to that. I think, I mean, the couple things I do, I do like about, you know, maybe where it's kind of sitting at right now is the thought that, know, it would be, uh, specific to managed accounts and also, uh, sponsors would have to opt in, you know, so a trustee representing the company would really have to think about how much liability they want to take on as that trustee to sponsor a plan. That's got, you know, a private equity, uh, you know, kind of unfiltered private equity allocation potential to it, and not the least of which is people are gonna just whether or not it's, uh, you know, within bounds or not. You know, if, if, like, you know, if, if you know of your staff, you know, made investments through their 4 0 1 in a big, big, uh, allocation of private equity and just. to that sector having issues or something like that, lose a bunch of money, you're gonna have a bunch of pissed off employees that you're gonna have to deal with. And, you know,

emily-sander_1_07-15-2025_160440:

Oh.

rory-liebhart_1_07-15-2025_160439:

just, that's just part of it. Where, index funds that are, you know, publicly traded and stuff, that doesn't create that much wild fluctuation that's away from the general macroeconomic

emily-sander_1_07-15-2025_160440:

What warning labels would you give people? Like if you're from the government, you're here to help, like, hey, sudden drops in liquidity may occur. Just know that going into this, this thing.

rory-liebhart_1_07-15-2025_160439:

Yeah,

ed--hizzz-_1_07-15-2025_160439:

Um,

rory-liebhart_1_07-15-2025_160439:

point. Yeah, I mean, a

ed--hizzz-_1_07-15-2025_160439:

there's.

rory-liebhart_1_07-15-2025_160439:

on what it really is, like use of leverage. I don't think people think about that aspect of it too much. They just oh, private equity means higher return because you know it's an alternative investment class. Well, what generates those returns is a use of leverage for the most part.

ed--hizzz-_1_07-15-2025_160439:

So I'll, I'll go to the, to the, California has a, has a regulation which basically says if something can cause birth defects or cancer, you have to label it as it can cause birth defects or cancer. And what ends up happening is everything is labeled. Because if you don't know, you have to label it. And so you know everything is labeled, so then no one pays attention. When it comes to investments, every stock, every mutual fund, every has a list of list of risks and a prospectus, or in the S one that basically says, here's all the, and no one reads it, and so it's you. You come out.

rory-liebhart_1_07-15-2025_160439:

Also true.

ed--hizzz-_1_07-15-2025_160439:

You could come out and you could come out with the, and here's, you know, it, it's, it's the, the way that these, the government, and again, I, I tend to be very libertarian in my approach anyway, but the government puts these regulations out and that's why I said that people get a false sense of security.'cause they sign these things saying, you know, according to Reg fd I did at, you know, I, all this stuff was disclosed. I didn't really read it. And it sounds like one of those stupid, like ozempic commercials where, you know, this may cause, you know, hair to grow outta your nose and you know, your ears are gonna pointy like an elf and all this other stuff. And they say so fast, you know, during the TV ad, you're gonna get that on, you get that on the investment side too, and it's all worthless, useless. Cover your ass stuff for the trustee. That's, that's all it, that's all the good it serves.

rory-liebhart_1_07-15-2025_160439:

All right. Ed's now officially been government in the high regulation. No, I'm kidding.

emily-sander_1_07-15-2025_160440:

What, what? Guys predictions for this. Would you say this goes through eventually or no? And if so, timing? How soon does this go through?

rory-liebhart_1_07-15-2025_160439:

shoot the clip, the clip that things are getting implemented now. I mean, I will say that about the current administration, they don't, you know, things are happening fast. I'd say, you know, soon, sooner rather than later. Perhaps like within the next 12 months, I would think.

ed--hizzz-_1_07-15-2025_160439:

Yeah, it'll happen before the next Congress. If it happens, it'll happen before the next congressional election.

rory-liebhart_1_07-15-2025_160439:

midterms. Yeah.

ed--hizzz-_1_07-15-2025_160439:

And. Although this could be regulatory, so it may be able to buy, it may, they may be able to use administrative procedures Act, throw it into regulation, not have to run it as legislation, you know, so it, it may, may be longer than that, but I would generally say, look, Liz, Liz, Warren, and I, I'm gonna actually go into a story. I've got a, I've got a story for, for,

emily-sander_1_07-15-2025_160440:

I with her.

ed--hizzz-_1_07-15-2025_160439:

so, so I, I would say that. Her concerns are, are concerns that are going to be shared by many of her colleagues. So, you know, Bernie's gonna feel the same way, and so and so, it wouldn't surprise me if you see it. The composition and the, the Senate and Congress are so evenly divided now that that composition is likely to swing in midterms. It normally goes against the party in power. And so as a result, I would expect if it doesn't happen by then, it's not gonna happen. Now I'm gonna, I'm gonna throw in a, a story'cause Rory might remember this. So back when the Bankruptcy Reform Act was passing

rory-liebhart_1_07-15-2025_160439:

2005 baby.

ed--hizzz-_1_07-15-2025_160439:

back in 2005, our general counsel

rory-liebhart_1_07-15-2025_160439:

Mm-hmm.

ed--hizzz-_1_07-15-2025_160439:

at Beline Lobbed in a call to Professor Elizabeth Warren to try and get her hired to do a consulting gig for us to understand what the impacts of the change of the regulations were gonna be. With the new Bankruptcy Reform Act

rory-liebhart_1_07-15-2025_160439:

amazing.

ed--hizzz-_1_07-15-2025_160439:

and Elizabeth Warren asked what type of business we were in and we said, well, we're a debt buyer and we buy bankrupt consumer debt. And she told, she told our general counsel, who was a Harvard law grad who kind of knew he, she basically told him to go pound sand and there was no way she was, and that companies like ours should, should not exist. And she hung up on'em on the phone.

rory-liebhart_1_07-15-2025_160439:

I did not know that. What a story.

ed--hizzz-_1_07-15-2025_160439:

Yeah. And she wanted, initially it was like a$800 an hour or a thousand dollars an hour to do the consulting work. And this was like in 2005,

rory-liebhart_1_07-15-2025_160439:

yeah.

emily-sander_1_07-15-2025_160440:

Wow.

ed--hizzz-_1_07-15-2025_160439:

so 20 years ago.

rory-liebhart_1_07-15-2025_160439:

Incredible.

ed--hizzz-_1_07-15-2025_160439:

exposure to Elizabeth Warren.'cause she was a bankruptcy professor, a law professor at, uh,

rory-liebhart_1_07-15-2025_160439:

that.

ed--hizzz-_1_07-15-2025_160439:

yeah. At Harvard?

emily-sander_1_07-15-2025_160440:

Did you ever speak with her or was that just through your Okay.

ed--hizzz-_1_07-15-2025_160439:

it was, uh, it was our GC did all the, did all the speaking.

emily-sander_1_07-15-2025_160440:

She was like, you can go fly a kite is what you can do. And then decades later, you're BFFs.

ed--hizzz-_1_07-15-2025_160439:

Yeah. We're BFFs. I call her Liz now because I.

rory-liebhart_1_07-15-2025_160439:

what I'll say is the, the, the sort of the, I think it's right the way that, know, she is approaching this, I mean, she's asking the right questions. I, I, I read the. The letter that she wrote to Empower, and, you know, they've yet empower being the company with a ton of, uh, records on retirement plans and things like that. It was kind of like trying to spearhead this from the other side. You know, the, the questions are, you know, to the point logical, basically asked in the manner of like, how are you gonna protect the average Joe, uh, here through this? What is your, in other words, what's your, what's your, what's your angle here? Dude, you know, like, what are you trying to accomplish here? is the, is is not the private equity current, uh, market and, you know, uh, capitalization and all that stuff. Good enough. Like what's the deal? Uh, anyway, uh, so we'll see this unfold. It's been, it's kind of a fun one to follow, honestly.

emily-sander_1_07-15-2025_160440:

Exit question for you two. What sounds riskier? Pri putting private equity in 4 0 1 Ks or letting chat GBT pick your portfolio.

ed--hizzz-_1_07-15-2025_160439:

Wow.

rory-liebhart_1_07-15-2025_160439:

What's risker? Hmm?

ed--hizzz-_1_07-15-2025_160439:

You know, I'm actually gonna go with the putting 4 0 1 Ks in the portfolio or putting, putting, putting the, uh, private equity in a 401k because,

rory-liebhart_1_07-15-2025_160439:

Okay.

ed--hizzz-_1_07-15-2025_160439:

yeah, because GPT is gonna, is gonna analyze all the information that's out there, is going to hoovered up a bunch of, a bunch of data is gonna be applying things like risk premium to a portfolio. And if you ask the question right, you're gonna actually probably get a well diversified portfolio that you should be investing in versus. You know, private equity in your 401k, you know, that's relying on me to make that choice for my 401k, and I'm, and I'm an idiot.

rory-liebhart_1_07-15-2025_160439:

That's a good answer.

ed--hizzz-_1_07-15-2025_160439:

wisdom of crowds is, is going to win.

emily-sander_1_07-15-2025_160440:

You need a good prompt for that? You'd want a good prompt for that. Chad, GBT.

ed--hizzz-_1_07-15-2025_160439:

a, I'm a fricking problem engineer. That's, that's what I am.

rory-liebhart_1_07-15-2025_160439:

Yeah, I, I, I'd say, I'll just take the other side of the coin just for the heck of it, only to say that, you know. I think there will be more inherent, uh, built-in controls if it, if it goes into play where you can, you know, pick private

emily-sander_1_07-15-2025_160440:

Hmm.

rory-liebhart_1_07-15-2025_160439:

funds outta your 401k. It, it just, it's not gonna pass without control and chat. BD can hallucinate and, you know, all this, all these things and you know, you just never know, even though it does have all of the internet that to draw on. So, yeah, I don't know. Tough, tough call. Probably ultimately agree with the chat GPT answer, but I needed to put something out there for the other side.

emily-sander_1_07-15-2025_160440:

All right. We got both sides of it now. Thank you, Rory. Thank you, ed.

rory-liebhart_1_07-15-2025_160439:

you. Good to see you. Yeah, we'll talk again soon.