Vanguard Looks To Enter The Private-Equity Arena

Vanguard Looks To Enter The Private-Equity Arena
  • Vanguard is known for its suite of investment products that cater to everyday investors.
  • The fund manager is looking to expand into the private-equity business.
  • Private-equity funds can command a 2% fee on AUM and another 20% on all profits.

Vanguard Group is the second largest provider of mutual funds and the second-largest provider of exchange-traded funds. The company is backed by $6.2 trillion in assets under management and will allocate some capital to a new private-equity fund, according to a Wednesday Wall Street Journal report.

The Game Plan

Vanguard has an excellent reputation among everyday investors who like it’s low-cost funds. But the company now wants to expand its image and gain scale with larger investors, according to WSJ. Private equity funds are not intended for everyday investors and come with higher fees for the manager. 

Vanguard could command a 2% management fee from investors on top of a 20% commission on profits. To be able to justify these fees, the company will team up with notable private-equity giant HarbourVest Partners, according to the publication’s sources.

Access to the private-equity fund will at first be limited to endowments, foundations, and institutions that have already tasked Vanguard to serve as their financial advisor. Later on, the fund will be made available to wealthy individuals who are also Vanguard clients, the sources also said.

Break In Tradition?

Vanguard’s founder Jack Bogle created Vanguard with one mission in mind: provide simple and affordable investment tools to the general public. Bogle passed away a year ago and the company needs to balance the founder’s vision with new projects tasked with increasing the firm’s profile and profit.

Vanguard’s current CEO Tim Buckley told WSJ the most important element for it to consider is “investors getting to keep more return than they were able to.”

“I can’t say it’s for all clients, but we think for many clients, it’s suitable,” he also said.

Advantages Of Private-Equity

Private-equity funds hold one true advantage over other investment products. Since private-equity funds invest in private companies, investors’ capital is locked in for a longer period of time compared to stocks. Also, the investment is made at an earlier stage of growth which also implies the potential for much higher returns if a company sells itself or goes public.

But in Vanguard’s unique case, the company needs to tread carefully to preserve its image with the middle class. This is a problem that other rival asset managers like BlackRock and Franklin Resources have to contend with.

Nevertheless, Vanguard has been exploring the prospect of entering the private-equity arena since 2001 so it likely had plenty of time to think of a strategy to get it right the first time.

By Jayson Derrick
Jayson Derrick has been writing professionally about stocks since 2011. He is particularly interested in alternative investments, hedge funds, and activist investing. He is a big fan of NHL hockey and lives in Montreal, Canada with his wife and four year old daughter.
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