Frugal investor Vanguard is reportedly eyeing a push into private equity. It could cause a 'cultural backlash' between haves and have-nots.
- Vanguard is reportedly eyeing private equity, a major change for an investment manager known for its low-fee offerings.
- Vanguard tried a similar approach - a fund-of-funds, where an external manager oversees investments - in 2001 that ultimately failed because of fundraising issues.
- Potential problems with this new push include creating a divide between individual and institutional investors, since most individuals can't invest in private equity, and a "cultural backlash" from proponents of low fees, said a finance professor.
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Vanguard is reportedly eyeing private equity - again.
The fee-conscious manager, which oversees $5.6 trillion for everyday and institutional investors, has talked with at least three private equity firms in the last year about offering funds to clients, the Wall Street Journal reported.
"We continually evaluate a range of products and services, but have no immediate plans to offer a private equity fund," a Vanguard representative told Business Insider.
The Malvern, Pennsylvania-based firm inked an agreement in 2001 to create a fund-of-funds offering, which did not materialize, reportedly because of problems fundraising after the dot-com crash.
Other major asset managers, including BlackRock, have looked to expand their investment options beyond stocks and bonds in recent years. Both wealthy individuals and institutional investors have clamored for more alternatives like private equity and infrastructure as they seek diversification and higher returns than the stock market. Alternatives managers, meanwhile, benefit from higher fees and capital that's locked up for longer than in mutual funds.
"It strikes me as a logical way for Vanguard to expand its assets under management and collect higher fees than are possible in running only index or other passive funds," Brian Hamilton, a partner at law firm Sullivan & Cromwell, told Business Insider. He also called it a "natural progression" in keeping with the trend of large investment firms like BlackRock, Brookfield, and Blackstone looking for different ways to expand.
BlackRock has built its alternatives capabilities, including real estate, energy, and private equity, internally. In April, the firm raised $2.75 billion for a long-term private equity fund. Vanguard, meanwhile, reportedly is once again considering a fund-of-funds model, with an external manager in charge of investing - similar to how it runs some existing funds.
"Having [private equity] in the portfolio for people, to the extent demand is increasing for those types of products, is worthwhile," Patrick Davitt, an analyst with Autonomous Research, told Business Insider. "I would be highly skeptical they could do it themselves."
At a May press conference, which Business Insider attended, Vanguard CEO Tim Buckley largely brushed off a question about expanding into alternatives.
"I'd never say never," he said. "In the [alternatives] space there's some great people, and there are also some crazy strategies. We have to make sure we find the right space there."
'There is no passive private equity'
Gregory Brown, a finance professor at the University of North Carolina, said that Vanguard's push into private equity could lead to a "cultural backlash" at the firm, whose founder prided himself on low fees and on opening up investing to the masses. He theorized that a fund-of-funds would be offered solely to large institutional clients.
"You can't do private equity on low fees. There is no passive private equity," Brown said. "Right now all their products are available to all their clients. There is this ethos in Vanguard that it is the democratization of investing. This would be creating haves and have-nots."
Alan Pardee, managing partner of placement agency Mercury Capital Advisors, said the private equity play isn't about revenue gain based on higher fees.
"They are the low fee shop and that is what they were born to do," Pardee said. "I can't imagine this is about figuring out how to increase their fees when their whole mantra is decreasing fees. This is about getting returns in an asset class that they don't currently touch."
There's no shortage of money entering private equity. Post-recession, fundraising started accelerating in 2013 and hasn't yet slowed. Last year, managers brought in $379 billion, and in the first quarter, managers raised $91 billion, according to industry magazine Private Equity International.