Simpson Thacher Aims to Realize Private Equity’s 401(k) Dreams

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at a law firm leading the push to “democratize” private equity investments for “retail” investors. Sign up for Business & Practice, a free morning newsletter from Bloomberg Law.

Private equity giants are salivating over the more than $10 trillion parked in Americans’ 401(k) plans. Simpson Thacher & Bartlett is hoping its prescient bet in this emerging advisory practice will keep paying dividends as more workers get the option to invest retirement savings in “alternative assets.”

The Wall Street firm’s lawyers have advised a group of the largest alternative asset managers—Blackstone, KKR, Carlyle, Apollo, and TPG Capital—and early adopters of a new strategy: Providing direct access to their private equity, infrastructure and asset-backed lending investments to accredited investors through a single investment fund.

The funds are precursors of what is often referred to as the “democratization” of private market investing, or bringing private investments to retail investors. The Trump administration is poised to supercharge the shift by allowing employer-sponsored retirement plans to access private equity investments—and also actively managed funds investing in digital assets like crypto.

So far, Simpson Thacher says 17 such “democratization” vehicles have been approved in the past decade, though they aren’t yet accessible to retirement account investors. Those funds are primarily aimed at wealthy investors, often requiring minimum investments in the five figures and limiting quarterly redemptions.

The firm has worked on getting 16 of them through a gantlet of regulators and across the finish line. If the retirement changes are made, there would be a slate of new vehicles launched. Blackstone is already creating a new “retirement solutions” group aimed at getting private equity offerings into 401(k)s.

Simpson Thacher has 21 partners and 125 lawyers total who mainly work on these deals. It’s hired from competitors including Willkie, Skadden, Ropes & Gray, Dechert, and Alston & Bird to build the team.

The US Department of Labor is poised to unveil new rules that could clear the path for a rollout of 401(k) investment products that include private equity investments. The administration in August issued an executive order calling for “democratizing” access to alternative assets in 401(k) plans. It asked the department to clarify its rules within 180 days, which will likely involve new guidance under the Employee Retirement Income Security Act to make it harder to sue employers who include private equity in their plans over fiduciary breach claims.

‘Spring Training’

For private equity giants, getting access to more Americans’ retirement savings could offset their struggles with traditional fundraising in recent years. There was $9.3 trillion in US 401(k) plans as of the second half of this year, according to data from the Investment Company Institute. Private equity fundraising declined from a high of $1.1 trillion in 2021 to about $765 billion last year, data from S&P Global show.

“People ask: ‘Is this the first inning or the second inning?’” said Rajib Chanda, who Simpson Thacher hired from Ropes & Gray 11 years ago to develop the practice. “I tell them, it’s spring training.”

Simpson has been gearing up. The firm hired or promoted 11 partners in the practice this year alone.

One law firm capturing work for such a wide range of private equity giants is rare in any business line.

While Blackstone and KKR have long been Simpson Thacher clients, Carlyle and Apollo have more commonly turned for legal advice to Latham & Watkins and Paul Weiss. The group has brought many first-time clients to Simpson Thacher, Chanda said.

Chanda credits the firm’s early market share in part to the fact that clients can’t look to one partner to solve the complexities of the deals. The process requires a large team working across practice groups such as registered funds, private funds, and capital markets. That makes it hard for competitors to build a rival practice through lateral hires.

Some clients have started the process at other firms and switched to Simpson Thacher midway through, he said. Other clients have heard through word of mouth that the firm’s team has worked to launch virtually all of the products.

“We have a bat signal,” Chanda jokes. “If someone, somewhere whispers the word retail or democratization, we show up. Even if people are just thinking about it.”

Critics of the plan, such as the Private Equity Stakeholders Project, say private equity’s high fees and illiquid assets are a risky bet for retirement plans.

“We’ve seen these firms send hospital systems, retailers, and other companies into bankruptcy while they profit and laugh all the way to the bank,” Chris Noble, the group’s policy director, said of private equity’s previous forays. “President Trump is inviting them to do the same with the retirement savings of millions of American workers.”

It’s not clear precisely how private market assets would fit into traditional retirement investing portfolios managed by companies like Empower, Fidelity or Vanguard. Much of those investments are in so-called “target date” funds that blend a mix of equity and credit investments.

Chanda said those retirement account managers will team up with private equity firms to offer a blend of private market investments in target date funds.

Such tie-ups are already being announced. Simpson Thacher represented Blackstone in a partnership it launched in April with Wellington Management and Vanguard to develop investment products that blend private investments into traditional retirement plans. Kirkland & Ellis advised Blue Owl Capital Inc. on a similar partnership with Voya Financial Inc. in July.

There Will Be Lawsuits

Another question is how the costs associated with private equity sponsors offering retirement products will compare with traditional offerings. Private equity fees are inherently higher than the low-cost index funds many retirement plans offer.

Companies that sponsor retirement accounts have already faced a swath of lawsuits arguing they offered funds with excessive fees. Trump’s executive order in August directed the Labor Department to prioritize curbing “frivolous” litigation brought against plan sponsors.

Many expect the new rules will include a safe harbor attempting to preempt litigation.

Chanda expects there will be lawsuits, but said he’s confident the plan sponsors will win those cases. The plaintiffs’ bar has already pledged to bring legal challenges.

In other words, a practice group that touts the wide range of skills it brings to bear is bound to add another group of lawyers to the mix: litigators.

Worth Your Time

On Law Firm Investments: Emily Siegel chronicles the big-money players flocking to Arizona to invest in “alternative” law firms as investors become comfortable with risk in the fledgling space.

On AI in Law: Clients aren’t yet seeing generative artificial intelligence make much of a dent on their law firm bills, with nearly 60% of in-house counsel having seen “no noticeable savings yet,” Isabel Gottlieb reports.

On US Attorneys: President Trump’s Chicago crackdown is forcing one of his more conventional US attorneys, Andrew Boutros, to balance the district’s entrenched apolitical traditions against escalating White House pressure, Ben Penn and Megan Crepeau report.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.