Vanguard Is Expanding Access to Private Equity. Most Investors Are Still Excluded, for Now.
Money-management giant Vanguard Group said on Wednesday that it plans to expand its private equity offering to qualified individual investors as soon as this summer. While the move could open a lucrative new business for the fund company, most regular investors still don’t have access to the asset class, which is typically preserved for the wealthiest.
Private equity invests in companies not listed on a public exchange, where capital can be used to fund new technology, make acquisitions, or restructure operations. Investors typically need at least $5 million in assets––excluding the primary home––and $200,000 in annual income in order to invest directly in a private-equity fund. That means 98% of the U.S. households are prohibited from doing so.
Of course, there are good reasons for that. Private equity is traditionally considered a riskier asset, so the rules are designed to protect retail investors from being burned. These investments usually lack transparency and liquidity, and have unlimited leverage and concentrated holdings. There is usually not enough publicly available information on how the money is deployed, and capital could also be locked up for the long term until certain transactions are completed.
But studies have shown that private equity tends to outperform publicly-listed stocks, and owning them––in appropriate amounts––could reduce portfolio risk through diversification. The private-equity industry has been trying for years to tap into the huge retail investing market, and a crack finally appeared last year.
In an information letter issued last June, the Department of Labor gave the green light for defined-contribution plans like 401(k)s to provide average retirement savers with the option to add private equity strategies in their portfolios, but only through multi-asset-class vehicles like target-date, target-risk, or balanced funds.
Vanguard is one of largest retail asset managers with more than $7.2 trillion under management, including more than $1 trillion in defined-contribution plans like 401(k)s.
The money manager entered the private-equity market in February 2020, when it formed a partnership with private-equity firm HarbourVest. Initially focusing on institutional advised clients like pensions, endowments, and foundations, Vanguard is now expanding the business to high-net-worth individuals.
Vanguard is looking to democratize private equity to reach retail clients, says Fran Kinniry, the firm’s head of private investments, although there is no timeline yet when that will happen.
Target-retirement fund investors typically have a long duration across decades, says Kinniry, and therefore can afford to have a portion of their portfolios in illiquid assets like private equity. “We are very encouraged by the DoL letter, we think it’s heading in the right direction,” he tells Barron’s.
Write to Evie Liu at [email protected]
