(We originally posted this in 2020. You can read more of our original ideas in our archive.)
Problem: Right now, investing in private equity funds is only open to accredited investors and qualified clients. However, on June 3rd “The U.S. Department of Labor, which oversees retirement plan rules, on June 3 issued guidance that’s been taken as a green light to include PE funds in some plans. It doesn’t say that workers should suddenly get an option to pick one by themselves. Rather a PE fund might be included as part of the portfolio of another diversified fund.”
Solution: A private equity fund that is funded primarily through 401ks. As described by Bloomberg in their article "Private Equity is Coming for The $6 Trillion 401k Market":
There’s roughly $5.6 trillion in such accounts (401ks), and the prospect of capturing even a sliver of it has the industry abuzz. A more complicated question is whether ordinary investors will really want their money going into buyout funds.
Private equity is a different beast from the mutual funds retirement savers are familiar with. PE managers often buy companies whole, financing the purchase with debt that ends up on the books of the companies themselves. That adds to potential profits but also to risk and complexity. Funds tend to have long lockup periods, during which investors can’t get their money out, and charge high management fees as well as take a share of profits off the top.
Since this new guidance was issued less than 30 days ago, the industry is ripe for disruption. Because it is so new, the business would be primarily focused on marketing the opportunity to prospective investors and educating them about the potential risks and rewards. Of course, since PE funds would be layered inside other funds, the business’ goal would be to become part of as many blended funds as possible: thus, another avenue of marketing would be to fund-makers to be included in their funds and receive 401k dollars.
Monetization: Ultimately, the goal of the business would be to acquire as much capital as possible: PE funds have a monetization model of fees (about 2%) and carried interest (20%). This business would adopt that model.
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)