Vanguard Expands Access to Private Equity to More Investors
Money management giant Vanguard Group said on Wednesday it plans to expand its private equity offering to qualified individual investors as early as this summer. While this move may open up a lucrative new business for the fund company, most regular investors still lack access to the asset class, which is typically preserved for the wealthier.
Private equity invests in companies not listed on a public stock exchange, where the capital can be used to finance new technologies, make acquisitions or restructure operations. Investors typically need at least $ 5 million in assets – excluding primary residence – and $ 200,000 in annual income to invest directly in a private equity fund. This means that 98% of American households are not allowed to do this.
Of course, there are good reasons for this. Private equity has traditionally been viewed as a riskier asset, so the rules are designed to protect retail investors from fires. These investments generally 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 in for the long term until some transactions are completed.
But studies have shown that private equity tends to outperform publicly traded stocks and that holding them –– in appropriate amounts –– could reduce portfolio risk through diversification. The private equity industry has been trying to tap into the huge retail investment market for years, and a crack finally emerged last year.
In one newsletter published last June, the Department of Labor has given the green light to defined contribution plans like 401 (k) s to offer average retirement savers the ability to add private equity strategies to their portfolios, but only through Multi-asset class vehicles such as target date, target risk or balanced funds.
Vanguard is one of the largest retail asset managers with over $ 7.2 trillion under management, including over $ 1 trillion in defined contribution plans like 401 (k) s.
The fund manager entered the private equity market in February 2020, when he formed a partnership with private equity firm HarbourVest. Initially focusing on institutional advisory clients such as pensions, endowments and foundations, Vanguard is now expanding its business to high net worth individuals.
Vanguard is seeking to democratize private equity to reach retail clients, says Fran Kinniry, the company’s head of private investments, although there is no timeline for it yet.
Investors in target retirement funds typically have a long tenure over decades, Kinniry says, and therefore can afford to hold part of their portfolios in illiquid assets like private equity. “We are very encouraged by the DoL letter, we think it is going in the right direction,” he said. Barron’s.
Write to Evie Liu at [email protected]