Vanguard Group is shaking up private equity, offering its first funds focused on the asset class through a partnership with HarbourVest Partners.
The private equity funds will initially be offered to institutional clients and ultimately to qualified individual investors as well, according to a statement Wednesday from the firm.
“We’ve been very clear that an asset class like private equity makes sense for investors, but only if you secure top talent,” Chris Philips, head of Vanguard Institutional Advisory Services, said in a phone interview. “If you’re not able to secure top talent on an ongoing basis, then you are better off in public markets, where there is transparency, liquidity, and a lower fee structure.”
Vanguard’s institutional advisory group generally caters to organizations with between $5 million and $1 billion in assets. Although Philips couldn’t provide specific information on the fees for the new offering, he said “the market will find that we have very competitive terms that investors won’t be likely to get on their own.”
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Part of Vanguard’s strategy in its actively-managed funds business, which has $1.5 trillion in assets, is to lower fees while giving investors a larger share of returns and managers a lower hurdle to outperform benchmarks.
“In public markets, if we can provide access and exposure on favorable terms, we’re increasing your odds of success,” Philips said. Vanguard is taking the same approach in private markets.
Vanguard isn’t concerned about the available capacity in the private equity market, which Philips says is worth $1 trillion globally. In addition, in the U.S. alone, there are 4,000 public companies, according to Vanguard, compared with 140,000 private companies that might meet the criteria of HarbourVest.
Vanguard’s private equity entry gives smaller investors access to a top firm that may otherwise be out of reach in the asset class, as well as a range of strategies. Buyers into the Vanguard fund will get diversification across primary private equity investments, secondary deals, and co-investments, said Philips. The fund will also provide exposure to Europe, Asia, venture capital, buyouts, growth equity, and multiple vintages of funds.
“We wanted to provide a turnkey solution and instant diversification,” he said.
As part of its due diligence of private equity firms, Vanguard’s private markets team evaluated factors, including the stability of the team, the experience and tenure in private capital markets, and the firm’s global reach.
“The list of firms got winnowed down rapidly. There are a lot of newer entrants in the industry,” said Philips. “But HarbourVest has 35 years of experience, a global network, and longstanding relationships with GPs in the industry.”