{"text":[[{"start":6.72,"text":"The writer is the former chair of the FDIC and author of ‘Money Tales’, financial education books for children"}],[{"start":15.8,"text":"The renowned investor Peter Lynch once said that “dumb money is only dumb when it listens to the smart money”. Retail investors should heed this advice as private equity and credit funds seek broader access in the US to tap their money."}],[{"start":34.86,"text":"Institutional investors have been steadily decreasing their exposures to private funds, so the funds are turning to mom and pop for capital. They promise superior returns and greater diversification. But they also offer high fees and fewer protections. It’s also dubious whether they will provide better returns."}],[{"start":60.81,"text":"Under US securities regulations, only “accredited investors” — those who meet benchmarks of financial sophistication — can directly invest in private funds. The privilege of raising capital from the general public is reserved for publicly traded companies, which are subject to much stronger regulatory oversight, reporting requirements and accounting controls. Public investment funds, as well as professionally-managed retirement funds, can invest a portion of their assets in private funds, but subject to various restrictions."}],[{"start":93.6,"text":"After lobbying from the private capital industry to loosen these rules, President Donald Trump issued an executive order which will dramatically expand inclusion of private funds in retirement plans such as 401ks, where some 70mn Americans hold some $9tn of retirement savings. The Securities and Exchange Commission had already stopped enforcing limits on private fund investments for closed end funds and has signalled it may broaden the definition of accredited investor."}],[{"start":127.04,"text":"Proponents say they want to “democratise” investing and give common people the same investment opportunities as the wealthy. While historically, private funds have beaten the S&P 500, more recently, this stock index has beaten them on a one-, three-, five- and 10 year basis, according to State Street data. Private equity claims that higher interest rates have hurt their debt-driven business, and performance will improve when borrowing costs drop. But it is unlikely we will return to the aberrational zero-interest rate policies after the Great Financial Crisis."}],[{"start":171.84,"text":"Importantly, for private funds to successfully access the retail markets, they will need to change their business models in ways that will weigh on returns. Private fund investors have to lock in their investments for long periods, typically 10 years, and are paid an “illiquidity premium” to do so. This gives fund managers the flexibility to manage their assets through cycles without having to meet redemption requests."}],[{"start":202.4,"text":"But retail investors will want structures giving them ready access to their money. This would reduce the flexibility of fund managers and likely raise the pressure to sell assets at discounts in times of stress to meet redemptions."}],[{"start":219.18,"text":"Exchange traded funds could help solve this problem. However, given murkiness over how private funds value their investments, investors would be uncertain about the true value of the assets. During turmoil, this uncertainty would inevitably lead to volatility and steep discounts in private fund ETFs."}],[{"start":241.52,"text":"Private fund advocates argue that funds will allow public investors to diversify their investments from popular stock indices like the S&P 500. But this dynamic index has stood the test of time, producing average annual total returns, which includes dividends, of 12.6 per cent from 1988. Fees for S&P 500 funds are low — less than 0.10 per cent — while private funds charge 1 to 2 per cent of invested capital, plus 15 to 20 per cent of profits. And to diversify, there are any number of public funds to choose from."}],[{"start":284.88,"text":"Instead of opening private funds to retail investors, the SEC should consider how to enhance the value of being public. It could do more to reduce regulatory costs. It should also tighten, not loosen, the “accredited investor” definition, which is hardly stringent, including investors who make over $200,000 a year or have over $1mn in net worth. It has not been updated since 1982, when around 1.5mn households met the definition. Now, over 40mn do. Private companies can already access a broad swath of investors. No wonder the number of public ones has shrunk by 50 per cent over the past three decades."}],[{"start":335.64,"text":"Institutional investors have recently shown some reduced enthusiasm for private funds, after fuelling their explosive growth. Private equity has grown from $700bn in assets in 2005 to $6tn today. Private credit assets under management have risen from $260bn in 2008 to more $1.7tn, according to Morgan Stanley. Are private funds due for a shakeout? “Smart money” should keep their investments in regulated, public funds."}],[{"start":378.64,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1755851635_6196.mp3"}