By Debbie Carlson
Vanguard built its reputation on democratizing investing, bringing institutional products to the masses and doing so cheaply. Its retail-investor-friendly moves – index funds and low fees — have endeared it to millions of investors.
But the asset manager’s recent push into private-equity markets is giving some fans pause.
The $7 trillion asset manager began providing institutional clients – pension funds, endowments and the like – access to private-equity investments in 2020 through HarbourVest Partners, an $85 billion, independent global private markets investment firm. It expanded into wealthier individuals earlier this year.
Vanguard wouldn’t disclose how many clients have invested in its first offering for individuals, the Vanguard HarbourVest 2021 Private Equity Fund , or the dollar amounts, but Fran Kinniry, global head of private investments for Vanguard, said the fund giant has exceed its goals “by quite a far margin.”
Private equity is a very different than the stock market — notoriously expensive and opaque, with little regulatory oversight and often requiring individuals to lock up money for a decade or more. It is open to individuals who are qualified purchasers—those with $5 million or more in investments — or accredited investors — a net worth of at least $1 million, or more than $200,000 in annual income.
Vanguard’s foray into this market comes as the Labor Department allowed plan sponsors to add private-equity investments to defined-contribution plans as part of professionally managed asset- allocation funds, generally known as target-date funds. None have done so yet, but private-equity proponents are pushing for this to become reality. Vanguard is a top choice in 401(k)s and runs one of the biggest target-date fund businesses.
Vanguard’s first offering to individuals set a $500,000 minimum investment, made over three years, and the term, or lockup period, is 14 years. Many of Vanguard’s mutual funds have a minimum investment of just $3,000, and few have any minimum penalty-free holding periods.
Jack ‘will roll over in his grave’….
Some advisers think Vanguard’s entry into private equity underscores that the firm is no longer the firm founded by Jack Bogle in 1975.
“I suspect [Bogle] will roll over in his grave” if he was asked about the private-equity foray, said Allan Roth, certified financial planner and founder of Wealth Logic, an investment advisory and financial planning firm in Colorado Springs, Colo.
Roth said he understands Vanguard is pursuing private equity for competitive reasons; money managers like Goldman Sachs and BlackRock are already in the space. “But I don’t necessarily agree with it.”
Rick Ferri, an investment advisor at Ferri Investment Solutions in Georgetown, Texas, also hosts the Bogleheads on Investing podcast , where he spoke at length with a guest about his worries. He’s particularly concerned about private equity’s high fees and whether these investments can be opened up to the masses the same way index investing was while still commanding high returns.
“That’s not how Jack thought of things. But then again, you know, when Jack was there, they had $150 billion under management. So it’s a different company for sure,” Ferri said.
Kinniry said Vanguard’s move into private equity follows in Bogle’s footsteps and giving individual investors access to markets traditionally open only to institutions. “What Jack stood for was taking a stand for all investors, especially retail investors. We find that this entry into private equity follows that exact template that he launched indexing with,” he said.
Vanguard led the charge to lower fees for its mutual funds and exchange-traded funds, causing a ripple effect across the industry. That led to the term “the Vanguard effect,” meaning costs often fell in whatever sector of the market the fund giant entered. In August, Morningstar said in its annual U.S. Fund Fee study that the average expense ratio paid by fund investors is half that of 20 years ago.
Both Ferri and Roth said they don’t know what Vanguard is charging investors for this private-equity fund, and Vanguard’s Kinniry wouldn’t disclose it, only saying that the fees are higher than the costs for Vanguard’s actively managed mutual funds, which are around 0.40% to 0.50%.
Private-equity fees typically are not disclosed, but they are often hefty, typically 2% of assets under management and 20% of the profits, dubbed “2 and 20”.