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00:00John we are seeing a major change on Wall Street which happens in good times with the freeing up of retail can buy sophisticated products and of course it comes down to the access to private equity. The access to hedge funds is years ago the access to private tax shelters. Are we heading for trouble. Oh I actually think this is a good development Tom and what prompted the discussion about private equity and individual investors is the FCC is decision recently to expand the definition of accredited investor which in the past has been tied to income levels and net worth and add modestly. Let's let's this is not opening the barn doors but add modestly to the types of individuals who can access private equity. And that followed on the heels of the Department of Labor allowing private equity allocations for 1 K plans earlier this year. Now the way I look at this from a policy perspective is just expanding. As you said the options available to individual investors access to more investment opportunities in a period when cash is zero funds or zero and stocks are fully valued . Obviously there are risks but I think the other piece outweigh those risks. John Taft I want to talk about the x axis which is the liquidity found in the stock market. Even the liquidity found in selected intangibles whereas the liquidity and private equity I don't see it . Well that is one of the single most important considerations for individuals considering an allocation of private equities. It is an illiquid holding. It takes about five years for fund managers . If you decide to go into a private equity fund to invest the money that you give them and then it takes another 3 5 years possibly longer for them to harvest those investments. So you're looking at holding periods of up to 10 plus years and that's an important consideration. That is not the type of investment somebody who thinks they might need cash a year or two from now wants to make. But in return for that illiquidity time you get a premium in return. And let's not forget half the economy is is in privately owned businesses not reflected in the public market indices. And until now that that opportunity to participate in that private market was restricted to a relatively small group of individuals . John what if our economy's changed pretty significantly in a way that we weren't expecting. What if loans increase significantly . What does it mean for some of the private equity investments . Well I actually I actually think that that private equity investors now what we're talking about here is professionals who put together funds and then we're talking about individuals investing in those funds. So we're talking about a diversified set of investments from the get go which is important. But I actually think handing your money over to professional investors who can be agile and adapt to changing market conditions is the way to go right now in in a world where many of the rules that undergirded our economy for the last decade or two are being rewritten. So I think this makes a lot of sense. Let's not forget Francine and Tom that this is not a new development . Increased allocations to private equity the smartest money in the world. Institutional investors have been building up their private equity allocations for years in search of returns in order to meet whatever liability targets they have. So all we're talking about now is making that type of opportunity available to individuals in a market where other investments quite frankly aren't that compelling . You know what I was trying to get at John this is how this health crisis will actually change our companies forever. Right . So you look at the stock market you look at the economy . They're pretty solid thanks to the unprecedented stimulus from the Fed and other central banks. But once that goes away what kind of economy will we actually be left with . Well if you're asking how will the market respond . We have as you point out been buoyed by shock and awe monetary policy shock and off fiscal stimulus. And if we want the market to stay at these levels and behave then we're going to have to continue doing that. So that's one thing. The second thing that you talked about was how is the economy going to respond to the health crisis. And and the point there is eventually we'll get to the other side of the Corona virus pandemic. The market is anticipating that's going to happen in the middle of two thousand twenty one. We think it could take a lot longer than that. And we also think that there are going to be and maybe this at some point you're getting it permanent changes in the way people approach work. I don't think we'll ever have a return to the type of in the office workforce presence that we used to have. Now is that a good thing or is it a bad thing . Truth is it's good for some sectors of the economy and some businesses and it's not good for others. Private equity investors are agile and can adapt to that just as public market managers can adapt to that. So I really don't see any difference in the risks you're taking by allocating funds to private equity when it comes to the permanent changes we're going to be experiencing in our underlying economy .

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SEC Changes the Definition of ‘Accredited Investor’

Baird Vice Chairman John Taft discusses the U.S. Securities and Exchange Commission easing restrictions on individuals investing in hedge funds and startup companies. He speaks on “Bloomberg Surveillance.” (Source: Bloomberg)

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