News that Vanguard Group, the US$5.6 trillion indexing and exchange-traded fund giant, is seeking to offer private equity products to its clients have turned commentators’ attention once again to the topic of small investors’ access to the asset class.
According to The Wall Street Journal, which broke the news, Vanguard held discussions with HarbourVest Partners and London’s Pantheon about potential partnerships to offer access to the products for clients of its advisory services, although no concrete outcome had emerged as yet.
Eric Balchunas, senior ETF analyst for Bloomberg Intelligence, set the plan against Vanguard’s push to expand its relatively small advisory business, as well as the reduced attractiveness of public markets. “There [are] less companies going public, they’re waiting longer; private equity is where there’s a lot of wealth to be made,” he said.
According to Mr. Balchunas, Vanguard’s key challenge is whether it can offer private equity products at “Vanguardian fees”, a reference to its reputation as the pioneer of low-fee index-tracking funds for the mass market.
In spite of his predictions that Vanguard could start that ball rolling, I don’t see it gathering any momentum. There just isn’t any incentive for private equity managers to lower their fees. They’re sitting on record volumes of dry powder and continuing to tap high demand for credible new funds. If anything, you could argue that private equity’s biggest problem is too much money, which is depressing returns and driving up entry valuations on investments.
Mr. Balchunas may claim that private equity is “ripe for disruption”, but I can’t see even Vanguard having an easy way to disrupt it. Perhaps institutions should worry more about general partners’ high fees, but for now, those hardly seem to be slowing them down. If Vanguard wants to bring private equity to the mass market, it’s going to have to figure out a way to bridge the gap between general partners’ fee practices and retail investors’ expectations.
Commentary in The Philadelphia Inquirer that Vanguard is more likely to target the “very wealthy” as an expansion of its high-end wealth management offerings make rather more sense to me.
I won’t be holding my breath waiting for “the Vanguard effect” to hit private equity. I might, however, wait with bated breath to see the private markets’ growing impact on public markets, and hence on Vanguard’s performance. But that’s another story for another day.