Vanguard Group has officially made its move into private equity by teaming up with HarbourVest Partners, a global private markets investment specialist, which has designed an investment option for Vanguard's outsourced CIO clients.
Under the partnership, Boston-based HarbourVest, which had more than $68 billion in assets under management as of Dec. 31, created a private equity strategy that will available to Vanguard Institutional Advisory Services' pension, endowment and foundation clients, the Malvern, Pa.-based manager said Wednesday.
New private equity mandates would be reported as assets under management for Vanguard, and HarbourVest would serve as a subadviser, Christopher Philips, who heads Vanguard Institutional Advisory Services, said Wednesday in a interview.
The private equity strategy "offers diversification and exposure across multiple layers," for Vanguard OCIO clients, and would give investors exposure to buyouts, venture capital, growth equity and potentially private credit, Mr. Philips said.
The fund also has exposure to the U.S., Europe and Asia, and clients could make primary investments, secondary investments and direct co-investments.
"It would be very challenging for even very large institutional investors to replicate (this diversification) on their own," Mr. Philips said.
"When you think about the need to acquire access to top talent, the top private equity firms and managers want to see consistent investment over time and substantial investment by their limited partners. Even billion-dollar programs can find that challenging," he added.
"While this strategy will be initially available to institutional advised clients, we aim to expand access to investors in additional channels over time," Vanguard CEO Tim Buckley said Wednesday in a news release. "For individual investors in particular, this partnership will present an incredible opportunity — access and terms they could not get on their own."
As of Dec. 31, Vanguard had $6.2 trillion in global assets, while VIAS managed over $50 billion within nonprofits, pension plans and other institutional investor clients, the new release said.
One channel that Vanguard could expand to, in addition to individual investors, is 401(k) retirement plans, which "could benefit from private equity," Mr. Philips said Wednesday.
"There's a lot of challenges in the 401(k) space that we would need to vet or understand. There's the regulatory (side) — you need to be qualified purchaser. And there is the question of how do you wrap that into a DC plan (and) illiquidity and how that works in a DC plan. There's a lot of mechanical (issues) we need to explore, which is why we don't have a yes or no at this time," he said.
One reason that Vanguard has entered private equity is because private markets have evolved over time are an "enduring strategy and asset class that exists," he said.
"By ignoring private markets, you are willfully taking a position that is excluding a significant chunk of the capital markets," Mr. Philips said.
In an advisory relationship, Vanguard can make sure there is an ongoing dialogue with investment committees, so clients can understand why they are investing in private equity and related issues like fees and liquidity, he noted.
Alec Lucas, a senior manager research analyst at Morningstar, said that the timing of this move "is interesting," for Vanguard, given challenges in private equity investing, such as fluctuating valuations of private companies, including so-called unicorns, like WeWork.
"I do think that it provides their advisory business with things that (other) players have, which is a private equity option," Mr. Lucas said, noting peers like Fidelity Investments, Capital Group and BlackRock.
"There is a lot of money in private equity investing overall, but the more scale you have, the more limited you are in your opportunity set. One of the things Vanguard brings is scale, and that's what keeps cost low. There's a tension in them coming to market where there is limited capacity. A way to handle that is to make it available to institutional advisory clients," Mr. Lucas said.
Adley Bowden, vice president of research and analysis at PitchBook, said Wednesday in an emailed statement that, for anyone who has been paying attention to the rise of private markets, "Vanguard's entry into private equity is not a shock."
"Vanguard (is) trying to make sure it can properly service its institutional clients by building them onramps into PE and VC, which have become core to nearly all institutional portfolios over the last decade. U.S. PE fundraising hit an all-time high in 2019, surpassing $300 billion for the first time ever," Mr. Bowden said. "2019 also marked another year in which institutional investors sought to raise allocations to alternatives — specifically to PE — a trend we see continuing."
