Should financial advisers be paying more attention to private equity?

While Vanguard denies reports it is jumping into the space, there is appeal among some investors for noncorrelated fund options

Jun 24, 2019 @ 2:17 pm

By Jeff Benjamin

Excitement for greater access to private-equity investments was sparked by a Wall Street Journal story Monday that The Vanguard Group may be pondering a move into the space. While the $5.2 trillion Malvern, Pa.-based asset manager told InvestmentNews it has "no immediate plans to offer a private-equity fund," should financial advisers be taking notice?

Vanguard, which built its reputation as a low-cost provider of index-based registered funds, already has an alternative-fund roster that includes the Vanguard Market Neutral Fund (VMNFX) and Vanguard Alternative Strategies Fund (VASFX), as well as a Vanguard Commodity Strategy Fund expected to launch this week.

"We continue to evaluate products and services for all clients, some of which have more complex investment strategies and programs," said Vanguard spokeswoman Emily Farrell. "We employ a rigorous, disciplined process for vetting product proposals, modifying existing funds and eliminating offerings that no longer meet a durable client need."

Even though Vanguard is denying it has current plans for a PE fund, Daryl Deke, chief executive of New Market Wealth Management, which specializes in allocating client assets into alternative strategies, said there are plenty of reasons to be thinking about alts at this point in the economic cycle.

"There are only 4,000 public stocks, and that number is shrinking, but there are two million private companies with 50 or more employees," he said.

Mr. Deke thinks it makes sense that asset managers and advisers would be focused on noncorrelated assets, but he also sees challenges to bringing certain strategies like PE to the masses in the way companies like Vanguard serve tens of millions of individual investors.

"The premise is correct and the demand is there because there's a premium for performance, but it's very difficult to access private equity in a liquid market," he said.

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, pointed out that Vanguard has a history of dabbling in the PE space.

In an email to his subscribers Monday morning, Mr. Wiener explained that Vanguard struck a deal in late 2001 with private-equity adviser Hamilton Lane Advisors to construct a fund of PE funds for wealthy investors.

The plan was to raise between $100 million and $750 million from investors in less than a year, but a lack of interest shuttered the program in May 2002.

Mr. Wiener said that original attempt at a PE fund for high-net-worth investors was hampered by high fees, including an 85-basis-point expense ratio on top of underlying PE fund fees of between 1% and 3%, plus between 20% and 30% of profits.

"For an index shop that barely gives credit to the few strong active managers that actually do exist, the idea that they'd promote active managers with huge fee structures just seems a hard [pill] to swallow," Mr. Wiener said.

According to New Market's research, the benefits of less-liquid private-market investing are real and measurable.

For example, during the five-year period through 2018, the average performance dispersion among public global equity funds was between 7.7% to 10.8%.

But for U.S. private-equity funds over that same period, the average performance ranged from 0.7% to 21.5%. For U.S. venture capital funds, the range was from a loss of 0.4% to a gain of 20%.

"The range of returns in public equity markets between the top quartile and average is a couple basis points," Mr. Deke said. "But it's a big difference between who is good and who is average in the private-equity space."


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