Valuation Questions Abound As Private Assets Enter 401(k)s
There’s a sizable gap between what everyday 401(k) plan investors expect from private-market valuations and the current industry standard.
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What is essential is invisible to the eye.
So said the fox in Antoine de Saint-Exupéry’s classic 1943 novella The Little Prince. He may have been talking about the true meaning of friendship, love and human connection, but the observation also rings true for private market investors. The absence of daily observable prices in the private markets is a longstanding challenge, creating structural issues that increase volatility and costs. It’s also the biggest question when it comes to the asset class’s entrance into 401(k) plans, according to Sheridan Porter, co-founder of FEV Analytics, a private markets technology company providing daily NAV valuations for illiquid private assets.
“We believe that your mom and pop investor deserves access to excellent deal flow in the private markets,” Porter told Advisor Upside. “The challenge is that the reporting standards that have been good enough for institutional LPs aren’t necessarily good enough for retail 401(k) participants.”
Porter is optimistic that asset managers, working with firms like hers, will be able to close the gap between the daily liquidity and pricing needs of 401(k) plans and the more opaque, illiquid nature of private equity (and other alternative asset classes). It will take some time and concerted effort, however, and financial advisors will likely play a key role in educating clients about the pros and cons of holding private assets in their retirement accounts.
Opposites Attract
Put simply, the problem of PE inclusion in retirement accounts is that private markets and 401(k) plans operate on fundamentally different clocks. Private equity was built around periodic valuation and long-duration capital, Porter said, while defined contribution plans were built around daily accounting, daily participant transactions and the expectation that the price attached to an investment is current enough to support those transactions. That mismatch is where firms like FEV Analytics are trying to create an infrastructure layer that “connects the clocks.”
How can they do so? By recognizing that a modern 401(k) private-market product might calculate a daily NAV for its private-market exposure without pretending that the underlying PE fund can be liquidated every day. Investors could be supplied with key information including:
- The latest reported NAV.
- Subsequent cash flows.
- Changes in relevant market, industry and company inputs and other valuation signals.
In theory, the 401(k) investor can then transact against the estimated NAV, while the investment vehicle manages the actual mismatch between participant cash flows and the liquidity of the underlying assets.
When Will PE Hit 401(k)s In Force? Probably not in the next six months, Porter said, but exciting things should start happening within the next several years. “I think you’ll slowly see more and more products coming online before things accelerate in the future,” Porter said. “There are already some daily priced evergreen funds right now. This is the preliminary toe in the water for this market.”
