$120 Billion Flows into Private Funds: Private Equity Eyes Retirement Funds in Deregulatory Push Under Trump

The private equity sector has witnessed a significant influx of capital, with government retirement funds and insurers pumping record sums into private equity investments. According to Preqin, US pension funds' private-equity investments grew to an average of 8.9% of holdings in 2021, marking three consecutive years of growth. This trend is not isolated to the US; a recent report by bfinance found that nearly two-thirds of insurers plan to reduce their exposure to fixed income and switch into private equity and other asset classes over the next 18 months.



This shift in investment strategy is driven by several factors, including the recent resurgence of inflation and the upward pressure on yields in fixed-income assets. Inflation has posed a risk to private equity, particularly for highly leveraged companies and those with weak pricing power. However, private equity investments focused on companies with strong pricing power can mitigate these risks and potentially yield higher returns than traditional stocks and bonds.

The deregulatory push under Trump has significantly influenced the private equity sector. The deregulation of securities laws, particularly the National Securities Markets Improvement Act (NSMIA) of 1996, increased the supply of private capital to late-stage private startups. This change in the going-public versus staying-private trade-off has brought about a new equilibrium where fewer startups go public, and those that do are older. Founders now have increased bargaining power vis-à-vis investors, allowing them to stay private longer.

Additionally, the Trump administration's tax cuts and regulatory reforms have made the United States a more attractive destination for private equity investments. The Tax Cuts and Jobs Act of 2017 reduced corporate tax rates, making it more profitable for private equity firms to invest in US companies. Furthermore, the administration's deregulatory efforts have lowered the barriers to entry and reduced compliance costs for private equity firms, allowing them to invest more freely in various sectors.

Moreover, the Trump administration's focus on infrastructure and manufacturing has created new opportunities for private equity investments in these sectors. The administration's infrastructure initiatives and efforts to promote domestic manufacturing have opened up new avenues for private equity firms to invest in and potentially profit from these areas.

In conclusion, the $120 billion influx into private funds, driven by government retirement funds and insurers, is reshaping the investment landscape. Private equity investments in retirement funds can offer potential benefits such as higher returns, diversification, and a suitable time horizon. However, there are also risks and challenges to consider, including illiquidity, opaqueness, fiduciary duty concerns, and legal challenges. The deregulatory push under Trump has significantly influenced the private equity sector by increasing the supply of private capital, making the United States a more attractive investment destination, and creating new opportunities in infrastructure and manufacturing. These changes have contributed to the growth and expansion of the private equity industry during the Trump administration.