A rush of retail money into private markets will likely push money managers to calculate the value of their portfolios with unprecedented frequency, KKR's (KKR.N) head of client services said.
Private market firms' portfolio valuations have come under broad scrutiny in the past year as their struggles to sell assets hampered returning cash to investors who are predominantly large institutions.
Now that KKR and other asset managers, backed by U.S. President Donald Trump, are working to funnel more of the roughly $12 trillion held in 401(k) retirement plans into alternative assets, which also include real estate and cryptocurrency, the demand for disclosure is likely to intensify.
Unlike the publicly traded stock and bond funds where that money traditionally sits, private equity assets are usually locked up for longer and their price is determined monthly or quarterly, which can mask volatility. As a result they have tended to be the preserve of bigger, more expert investors who accept slower payouts and less immediate price information.
The market for defined-contribution (DC) plans, which give no guarantee of a payout when a saver retires, "have all been built on a chassis that's really created for public markets and daily pricing and daily liquidity," KKR's Eric Mogelof told former hedge fund executive Ted Seides on his "Capital Allocators" podcast.
Assigning a price each day, which could be necessary for the more frequent transactions those investors want to do, is "the bigger challenge," Mogelof said.
"Either the chassis in 401(k) needs to change and you restrict transactions to a monthly basis. What's more likely is we over time as an industry work on daily pricing all of the various different private markets."
Funds use comparisons with other companies and transactions or metrics like discounted cash flow to arrive at valuations, in a process known as marking.
Most alternative asset managers have said large-scale participation from 401(k) savers will take time.
"There's no doubt in my mind, in a decade from now, we will see very meaningful allocations within that DC market to private markets," Mogelof said.
