- Low-cost money manager Vanguard is bringing private equity to the masses.
- Its second fund, in partnership with Harbourvest, is set to more than double its target size.
- Private investments head Fran Kinniry told Insider about the firm’s growth plans in private equity.
- See more stories on Insider’s business page.
Vanguard, the asset manager best-known for its low-cost passive fund offerings, has moved a step closer to its eventual goal of bringing private equity, an asset class that historically has been accessible only to the most sophisticated investors and institutions, to retail investors.
The $7.5 trillion manager is raising for its second private equity fund, which will be available to individual accredited investors. Vanguard made its first foray into private equity in February 2020 through a partnership with private equity fund-of-funds HarbourVest Partners.
Its offering so far has been met with enthusiasm from investors, its inaugural fund closed at double its target size, which the firm declined to disclose, in February 2021.
Vanguard’s global head of private investments, Fran Kinniry, told Insider that its second private equity fund, which it is currently raising, is on track to outpace the first in terms of assets.
While the first fund was only available to institutional clients like pensions and endowments, Vanguard said in mid-May that it would open the 2021 fund to accredited investors — a group of sophisticated retail investors classified as such under SEC regulations by meeting net worth or income thresholds or holding specialized licenses.
At first glance, its efforts to bring private equity to retail investors’ portfolios may seem misaligned with Vanguard’s core mission of providing low-cost products. Private equity, while attractive to investors for its strong performance, is also known for its relatively high management fees.
Kinniry said Vanguard’s principal motive in expanding into private equity was to improve client investment performance. The HarbourVest-operated 2021 fund, Kinniry said, is geographically diversified, with over 15% allocated to venture capital and some exposure to growth equity, providing exposure to private startup investments as well as traditional leveraged buyouts.
“There’s not actually a close second investment that we could buy that has the ability to improve client outcomes as much as private equity,” Kinniry said.
How Vanguard is imagining “low-cost” for private equity
Kinniry said that in the long-term Vanguard hopes to “democratize” private equity for non-accredited retail investors.
He said one way the firm could do this is through incorporating private equity into target funds for employer-provided retirement plans such as 401(k)’s, a practice which the US Department of Labor greenlighted last summer for some professional managers.
“Low-cost” can be defined differently in different parts of the market, Kinniry said. Just as low-cost index fund would likely charge below the typical benchmark of 10 basis points, a low-cost private equity fund would be less relative to the the standard “two and twenty” annual fee structure. Typically alternative fund managers charge investors 2% of total assets under management and 20% of any profits. Kinniry declined to disclose Vanguard’s specific private equity fee structure, citing regulatory restrictions.
Kinniry said that while Vanguard believes strongly in low costs, providing high outcomes for both its institutional and retail clients is its top priority.
“We believe our [private equity] offer is very, very cost-competitive, especially for the clients that will be buying this. Almost all the clients at Vanguard could not replicate the economics on their own without Vanguard,” Kinniry said.
Kinniry said that the expansion into private equity, while it may seem unconventional, aligns well with founder Jack Bogle’s original vision for Vanguard by bringing a sophisticated institutional investment to the retail client.
“What Jack [Bogle] did was ‘retailize’, or democratize, access to indexing for the average family. And then he did the same with active [investing], and now we hope to do the same with private equity. This asset class has been outperforming for institutional clients, sovereign wealth funds, and family offices for years,” Kinniry said.
“All of our efforts are trying to bring this asset class to investors who need it the most — and those are investors who have been shut out of the debate class because they don’t have enough assets.”
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