The Velvet Rope of Private Equity Opens for Retail Investors

The Nasdaq Stock Market is expected to open the velvet rope of the exclusive Private Equity VIP room to retail investors.

In the near future, Mom and Pop investors can turn their hard earned retirement savings over to the big boys at the Carlyle Group, Blackstone and KKR hoping that they can earn the big returns on their savings.

Mainstreaming the once exclusive private equity club is yet another indication that Wall Street is successfully pushing high risk alternative investment products that often lack liquidity on Mom and Pop investors. The problem is, Mom and Pop, along with many of their financial advisors, commonly don’t understand such products and their attendant risks.

“One of Wall Street’s most exclusive investment products is inching toward the mainstream,” reported William Alden of the New York Times.

“Private equity funds — vast pools of capital that buy and sell entire companies — may become more accessible to smaller investors under a plan being contemplated by the company that runs the Nasdaq stock exchange, a person briefed on the matter said on Friday,” according to Alden. “The plan, still in its preliminary stages, envisions a market where investors in private equity funds can sell their stakes to individuals whose net worth falls far below the usual threshold for such investments.”

I simply can’t see how this is such a good idea for mainstream investors.

Most brokers peddling these exclusive investments are unlikely to make investors aware of the highly risky nature of these speculative bets.

The risk disclosures of these offerings are thin and most investors will not be told that the failure rate for private deals is high and the promised returns do not often materialize.

There was a sound reason that these deals used to be the exclusive province of the rich and famous– they could afford to lose the money invested. For most investors saving for retirement, this is irreplaceable money.

Even the financial services industry thinks that mainstreaming private equity is a bad idea.

On Saturday, Bloomberg reported one financial services CEO’s disbelief and dismay at the proposal. “Private equity funds are probably too complicated for the average investor’s retirement account, according to Principal Financial Group Inc., which provides the plans to 3.8 million people,” reported Bloomberg’s Zachary Tracer.

“’When people start talking about ETFs and liquid alts and private equity and all of that stuff, I too chuckle a little bit,’ Principal Chief Executive Officer Larry Zimpleman said on a conference call Friday in response to a question about including exchange-traded funds and other options in 401(k) plans. ‘It’s really hard to see how that is something that can be easily explained,’” Tracer reported.

Watch out, Mom and Pop. The giddy exuberance most savers may feel at being admitted to the Private Equity VIP club will likely turn into regret. Main Street will rue the day they decided to flee quarter slot machines and place their bets at the Big Boys’ black jack table.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

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