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Dec. 7, 2021, 7:53 a.m. EST

As Vanguard pushes into private equity, some fans get queasy

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By Debbie Carlson

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Vanguard chose HarbourVest because of the company’s long-term performance record and its philosophy of putting client outcomes first, which Kinniry said was most unique among the managers interviewed.

Will strong returns continue?

Citing the usual caveat that past performance doesn’t equal future results, Kinniry pointed out that HarbourVest outperformed the MSCI ACWI index, which tracks about 3,000 stocks in 49 developed and emerging market countries, by 700 to 800 basis points net of all fees in the firm’s 35-year-plus history. Vanguard has a more conservative estimate of expected outperformance, and returns may fall of if private equity becomes more democratized, as the firm expects, he said.

“We’re somewhere thinking that net returns over public markets will be 300 to 400 basis points,” Kinniry said, while stressing the lockup period of this type of investment repeatedly to investors. “If the future is anywhere, even half of its past with HarbourVest, we believe investors will have higher net outcomes even though they have higher costs,” he later added.

Another concern Roth and Ferri have is whether the high returns will remain if more investors are fighting over the opportunity to invest in good private companies. Consultants at Deloitte forecast increased interest could boost private-equity assets under management to $5.8 trillion in 2025 from $4.5 trillion in 2019.

That also could shrink the illiquidity premium—the reward private-equity investors traditionally have received for locking up their money for years. Kinniry said the illiquidity premium should fall to about one-third or one-half of the 3 percentage points it’s been historically as more investors enter the market, but it won’t disappear.

Investors should focus on private equity’s demand side, not supply, he said. There are many more small, private companies than public firms, and these are small companies without private backing. “As private-equity supply grows, we’re seeing more and more of the demand side. And so I think the two will very easily equate to each other,” he said.

Kinniry also suggested that investors who may be saving for children or grandchildren may not need to put all of their money in easy-to-sell assets like stocks and bonds.

“If I have a 30-year horizon, and I can get 100 to 200 basis points in illiquidity premium, why wouldn’t I want 20 or 25 or 30% of my portfolio (in illiquid assets)? You don’t want to go too far. You don’t want to be 80% illiquid. But I would argue that investors are probably too liquid given their time horizon,” he said.

Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @DebbieCarlson1.

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