Vanguard Considering Private Equity for the very wealthy: WSJ

Vanguard is again considering jumping into the private equity realm, an alternative investment generally considered only for the very wealthy.

Vanguard has been in talks with HarbourVest Partners in Boston and Pantheon Ventures in London, plus at least one other firm, to give private market strategies to clients of its advisory services, according to a story in the Wall Street Journal.

It could mark a huge departure for the low-cost index fund giant, which now manages $5.6 trillion in assets for investors globally."

“If everyone else is going there just because it’s profitable doesn’t mean we should go there,” Vanguard CEO Mortimer “Tim” Buckley said in an interview with the Journal earlier this year. “We will only go somewhere if we think we can do it better for your portfolio,” he said.

“We continuously evaluate our products and services, but have no immediate plans to offer a private equity fund,” said Vanguard spokeswoman Emily Farrell.

Private equity funds, like many alternative investments, charge a management fee and a performance fee annually. Typically, the funds charge 2 percent of assets as a management fee and up to 20 percent of the returns as the performance fee. Minimum investments are generally $500,000 and higher.

Vanguard has taken a stab at offering private equity and other alternatives such as hedge funds in prior years, noted Daniel Wiener, who follows Vanguard for clients. "This isn’t Vanguard’s first foray into the world of high minimum, high-cost, high stakes investments. As before, Vanguard’s goal is to attract more high-net worth investors into the fold.”

In 2001 Vanguard inked a deal with Hamilton Lane Advisors, a Bala Cynwyd private-equity adviser, to put together a fund-of-private-equity-funds to offer to its high net worth clients, such as those in its Flagship program, plus institutions.

Claiming that well-selected funds would outperform index funds, Vanguard in 2001 said it would charge a fee of 0.85 percent, then hand 0.50 percent over to Hamilton Lane while keeping the other 0.35 percent.

Investors, however, would not only pay this fee to Vanguard, but would also be paying the underlying 1 percent to 3 percent annual fees for each private-equity fund the portfolio invested in, plus the 20 percent to 30 percent of profits, or so, that typically goes to the private equity fund’s advisors.

This was the proposal 18 years ago in a time of higher fees, but it shows how this kind of product is typically expensive.

“Not surprisingly, most investors in funds that charge massive performance fees on top of large annual fees don’t fare particularly well, though the funds’ managers can rake in tens and hundreds of millions of dollars,” Wiener added.

Vanguard said it planned to raise at least $100 million and as much as $750 million for the fund between November 2001 and March 2002. The plan never happened.

In 2013 the specter of offering private equity or hedge fund options through 401(k) plans and target date funds was floated in a story in Business Week. Vanguard flatly denied having any interest in the idea.

Apparently, though, the idea been reborn under chairman Tim Buckley, who has been keen on remaking the investment giant.

Vanguard’s objective is to attract wealthier clients to the Malvern-based investment firm, founded by the late John Bogle.

“Whether Vanguard can come up with a better and more attractive offering this go-round remains to be seen," Wiener said. "If they go ahead, I expect their marketing will emphasize both the purported market-beating potential of a portfolio of private-equity funds as well as their lack of correlation with public market securities. I don’t think Vanguard will be able to ... leverage its reputation as a low-cost leader when it comes to a notoriously high-cost, and typically market-lagging investment enterprise.”