Private Equity Vanguard

[Hogan773]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

[jebmke]

heh heh; Bloomberg headline

Private Equity Payouts at Major Firms Plummet 49% in Two Years

[retired@50]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

See link The case for private equity at Vanguard from Feb. 2021.

Regards,

[rockstar]

If I want more PE exposure, I’d buy BX and collect the dividend.

[Hogan773]

heh heh; Bloomberg headline

Private Equity Payouts at Major Firms Plummet 49% in Two Years

Yeah I read that article this morning

That's a temporary thing and not necessarily indicative of a poor return over the whole cycle

That said my general sense is that the best place to be in PE is the manager who is collecting 2 and 20 on all the invested capital.

[Hogan773]

If I want more PE exposure, I’d buy BX and collect the dividend.

Fair, similar to my comment about that it is most ideal to be Steve Schwartzman or Mark Rowan if you want to get truly weathly in PE

[jebmke]

heh heh; Bloomberg headline

Private Equity Payouts at Major Firms Plummet 49% in Two Years

Yeah I read that article this morning

That's a temporary thing and not necessarily indicative of a poor return over the whole cycle

That said my general sense is that the best place to be in PE is the manager who is collecting 2 and 20 on all the invested capital.

or the large, early investor who is probably not paying the full boat fee.

[Hogan773]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

See link The case for private equity at Vanguard from Feb. 2021.

Regards,

Thanks for this

Doesn't give any details of the program though

[retired@50]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

See link The case for private equity at Vanguard from Feb. 2021.

Regards,

Thanks for this

Doesn't give any details of the program though

When I looked into it there was a $500,000 minimum buy-in, with the possibility of needing to come up with more. It's a bit like buying into a partnership if I recall correctly. It may (or might) serve a purpose, but only if you can remain patient.

Regards,

[Valuethinker]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

After fees, you are unlikely to outperform Vanguard Total Stock Market fund.

Larry Swedroe points out a better benchmark might be small cap value stocks.

You might get some diversification benefits. But this is largely illusory. Funds are valued based on historic metrics like past transactions for investments. Whereas actual cash returns to investors depend on future valuations. Whereas a stock pretty much instantly reflects what is known about the performance of the underlying company, it is stock price. NAV for a PE fund is backward looking. Steep falls in the stock market will likely be followed by falls in the NAV of PE funds - but with a reporting lag. So it's not really that returns are less correlated, it's simply that the reported returns haven't caught up with the stock market ones.

Admission. I do something similar in the UK. But there, listed Closed End Funds are workable (no tax problems). They hold the Limited Partnership interests in PE funds. I have no idea whether they actually outperform, given the high fees attached. UK equities have underformed major indices for so long that *anything* looks good (almost).

[rule of law guy]

If I want more PE exposure, I’d buy BX and collect the dividend.

+1

PE sponsors have increased their reliance on recurring fees rather than big M&A/IPO payoffs, so you might not even get PE exposure by buying PE stocks, but fielding a Vanguard call is not where I would start

[rockstar]

If I want more PE exposure, I’d buy BX and collect the dividend.

Fair, similar to my comment about that it is most ideal to be Steve Schwartzman or Mark Rowan if you want to get truly weathly in PE

If it’s good enough for them, why invest in an actual fund with those crazy high fees?

[Wiggums]

Private equity has the potential to make you a lot of money. UL Unfortunately, not every investment is a winner. Private equity is generally Illiquidity and has lock-up periods. You are subject to higher risk, and perhaps, volatility. Often there is limited transparency, and information available.

[Hogan773]

So I googled around some more and found this

https://www.fnlondon.com/articles/vangu ... d-20220224

Which generally fits my worldview prior to getting the secret email from Vanguard this morning inviting me to learn more about their elite club

I don't even think I will bother hearing the pitch. I don't want to sign up for 14-17yrs of extra fees and K1s. If I end up making an extra 3% annual return on that $500K after all the fees, it's not going to change my life. I would have an extra $500K that I wouldn't have otherwise. Nice for sure, but not enough for me to get that Gulfstream jet I've been eyeing. And in the meantime I have locked up funds and have to deal with K1s for 14 years.

[nyclon]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

Your hunch is correct. That doesn’t mean it’s a bad product. Search this forum for Harbourvest and you’ll find relevant discussion. Re: tax, PFIC may be a thing you have to deal with too, depending on your preferences.

[JKPS]

see update.

[JKPS]

I keep getting solicitations from Vanguard about their HarbourVest Private Equity. It is a large, long term commitment. Is it worth the risk?
How about Private Equity ETFs with more liquidity? Vanguard search lists PSP, PEX etc. Are they worth it?
I am currently invested in Vanguard mutual funds and ETFs - all index and with exposure to global equity and bonds.
Will Private Equity provide diversifivation?
Any comments?

[Hogan773]

I keep getting solicitations from Vanguard about their HarbourVest Private Equity. It is a large, long term commitment. Is it worth the risk?
How about Private Equity ETFs with more liquidity? Vanguard search lists PSP, PEX etc. Are they worth it?
I am currently invested in Vanguard mutual funds and ETFs - all index and with exposure to global equity and bonds.
Will Private Equity provide diversifivation?
Any comments?

I think by definition it "provides diversification"

The question is, will the return be sufficiently higher to offset the higher fees, tying your money up for 14 years, plus compensate you for the "pain" of getting K1s every year, having to file extensions on your taxes every spring because the K1s don't come out until summer, etc.

I don't know the ETFs...presumably those aren't the same thing and don't have the same tax K1 issues but I'm not sure. I will take a look at those for curiosity. EDIT: Just clicked quickly on PSP. It is an ETF that invests in "Private Equity Companies" so it would be investing in the equity of asset managers like Blackstone, Ares etc. It also mentions that it invests in BDCs which are private credit...basically making leveraged loans to private equity portfolio companies....so higher return and higher risk....

[JKPS]

Thanks. Too many hassles like K1 for dubious rewards. I think Vanguard is trying to get into higher margin businesses. Used to provide free portfolio review; now they only do it if you have a "managed account" with fee as % of assets...

[JAZZISCOOL]

Not sure if this was mentioned above but Morningstar's "The Long View" podcast had a deep-dive on the PE product a few years ago; I thought it was interesting. Personally I don't like the long-term lockup (illiquidity) and high fees with PE (in terms of risk/reward). I don't recall the terms here.

"Fran Kinniry: Applying the Vanguard Approach to Private Equity"

https://the-long-view.simplecast.com/ep ... y-lI3GzarI

[unwitting_gulag]

Confused here. When I think of "private equity", what comes to mind, is that a professor at the local university wants to commercialize his research, taking it off-campus. He needs money. Along comes somebody who wants to diversify beyond public markets. Our hero then fronts a few $M, "leading a funding round" (in this case, seedling) to get the company started. In exchange, he or she gets a seat on the board, and maybe even gets a C-suite position. There are no "funds"... no Blackrocks or Blackstones. What am I missing?

[Hogan773]

Confused here. When I think of "private equity", what comes to mind, is that a professor at the local university wants to commercialize his research, taking it off-campus. He needs money. Along comes somebody who wants to diversify beyond public markets. Our hero then fronts a few $M, "leading a funding round" (in this case, seedling) to get the company started. In exchange, he or she gets a seat on the board, and maybe even gets a C-suite position. There are no "funds"... no Blackrocks or Blackstones. What am I missing?

Ummm with all due respect, you're standing in front of the largest Royal Caribbean cruise ship and squinting like "hmm I don't see any boats here, what am I missing"

PE refers to a huge industry where Blackstone and Apollo and Ares and others raise funds to invest that money in private buyouts or growth situations or LBOs or whatever. You are sort of describing Angel Investing I think. Then there is Private Credit which is the hot topic right now. Somehow Stephen Schwartzman just made almost a billion dollars over the past year from his ownership of 20% of Blackstone. And that take was down 30% from the prior year. I'm guessing he isnt a Vanguard client haha

[nyclon]

Confused here. When I think of "private equity", what comes to mind, is that a professor at the local university wants to commercialize his research, taking it off-campus. He needs money. Along comes somebody who wants to diversify beyond public markets. Our hero then fronts a few $M, "leading a funding round" (in this case, seedling) to get the company started. In exchange, he or she gets a seat on the board, and maybe even gets a C-suite position. There are no "funds"... no Blackrocks or Blackstones. What am I missing?

Ummm with all due respect, you're standing in front of the largest Royal Caribbean cruise ship and squinting like "hmm I don't see any boats here, what am I missing"

PE refers to a huge industry where Blackstone and Apollo and Ares and others raise funds to invest that money in private buyouts or growth situations or LBOs or whatever. You are sort of describing Angel Investing I think. Then there is Private Credit which is the hot topic right now. Somehow Stephen Schwartzman just made almost a billion dollars over the past year from his ownership of 20% of Blackstone. And that take was down 30% from the prior year. I'm guessing he isnt a Vanguard client haha

They’re referring to venture capital. Which is included as part of the harbourvest / vanguard offerings portfolio construction.

[BF3000]

Harbourvest has an excellent track record, and I am confident that vanguard has beaten it down in fees. If a person doesn’t mind the illiquidity issue, it might be worth a listen.

The biggest hangup for me would be taxation of distributions. A person who has enough net worth to get invited to this product could probably invest in ETFs and never sell… and have the capital gain wiped out for heirs by the stepped up basis rule. The drag from taxes on qualified dividends is minuscule.

[Hogan773]

Harbourvest has an excellent track record, and I am confident that vanguard has beaten it down in fees. If a person doesn’t mind the illiquidity issue, it might be worth a listen.

The biggest hangup for me would be taxation of distributions. A person who has enough net worth to get invited to this product could probably invest in ETFs and never sell… and have the capital gain wiped out for heirs by the stepped up basis rule. The drag from taxes on qualified dividends is minuscule.

You mean all the K1 stuff that needs to be dealt with?

[2commaBH]

Bumping this thread, as I am considering an investment into the 2024 vintage. Anyone doing this? Details as I understand them:

Fund of funds structure, primary/secondary investments into other funds/firms with some co-investment opportunities
3 year investment period, 14 year fund life plus extensions
Option for US master or offshore feeder (K-1 or PFIC)
Harbourvest sub line smooths capital call frequency to 3-4 times annually
$500k minimum commitment
Vanguard annual fee of .30 basis points on committed capital
Harbourvest annual fee of .20 basis points on committed capital
Harbourvest 12.5% carried interest on secondary investments or co-investments after 8% hurdle
Underlying fund fees TBD depending on investment, assume 2 and 20.

I know private equity is not a very BH thing to do, so please don't derail the thread with general anti-PE bias. I am comfortable with PE in general.

I probably won't do this but curious to hear from anyone that has.

[Valuethinker]

Bumping this thread, as I am considering an investment into the 2024 vintage. Anyone doing this? Details as I understand them:

Fund of funds structure, primary/secondary investments into other funds/firms with some co-investment opportunities
3 year investment period, 14 year fund life plus extensions
Option for US master or offshore feeder (K-1 or PFIC)
Harbourvest sub line smooths capital call frequency to 3-4 times annually
$500k minimum commitment
Vanguard annual fee of .30 basis points on committed capital
Harbourvest annual fee of .20 basis points on committed capital
Harbourvest 12.5% carried interest on secondary investments or co-investments after 8% hurdle
Underlying fund fees TBD depending on investment, assume 2 and 20.

I know private equity is not a very BH thing to do, so please don't derail the thread with general anti-PE bias. I am comfortable with PE in general.

I probably won't do this but curious to hear from anyone that has.

I own a number of PE funds via UK Closed End Funds (would trigger PFIC for an American taxpayer, I believe). I bought them at a considerable discount to NAV. That gap has become more "normal" (now down towards 10-20%, from 30-50%).

The fees are what they are on the above and Harbourvest is a good name, and at least there is a hurdle on the Carry.

But you will need to make a call on the PE cycle. That, tbh, is where I am uncomfortable. The industry is raising more money than it is paying out, in effect recycling clients' money as fees for itself. There's no actual net cash flow out of the industry going on, as far as I can figure out.

OTOH the multiples on quoted stocks look excessive - particularly in the USA. But that's partly because of things like Nvidia and the "AI Boom". NVidia's biggest customers are other big 7 internet firms, it seems.

(Venture Capital valuations I have been sceptical of for several years. Based on previous cycles, the meltdown has only just started - another year (2, 3?) before the shakeout really gets going, and realistic valuations (& stronger business models) start to emerge. The industry hopped nicely from c-o as a theme, to "Artificial Intelligence", and that seemed to prolong things).

[illumination]

I keep getting solicitations from Vanguard about their HarbourVest Private Equity. It is a large, long term commitment. Is it worth the risk?

I just find it funny that people still make the case that Vanguard is some altruistic institution that would never push consumers into products with high fees.

Here's some of the fees listed for HarbourVest, exactly how much of this is being passed through to investors from Vanguard? All of it? I know this is how PE works, but still something to keep in mind when people just point to (performance chasing) returns.


Management fees
HVPE pays management fees to the HarbourVest funds it invests in, and is subject to the same fees as other investors. For example, the HVPE Charlotte Co-Investment L.P. investment had a weighted average effective annual rate of 0.89% on capital committed in 2022.
Performance fees
The underlying GP funds that HVPE invests in charge a performance fee, also known as "carried interest", of 20% of gains over an investment.
Performance fees on HarbourVest's investments
HarbourVest may also take a performance fee of 12.5% on profits from certain of its investments that exceed an 8% hurdle rate.
Management and performance fees on other funds
HarbourVest may also pay management and performance fees on the other funds it invests in.

[Valuethinker]

Bumping this thread, as I am considering an investment into the 2024 vintage. Anyone doing this? Details as I understand them:

Fund of funds structure, primary/secondary investments into other funds/firms with some co-investment opportunities
3 year investment period, 14 year fund life plus extensions
Option for US master or offshore feeder (K-1 or PFIC)
Harbourvest sub line smooths capital call frequency to 3-4 times annually
$500k minimum commitment
Vanguard annual fee of .30 basis points on committed capital
Harbourvest annual fee of .20 basis points on committed capital
Harbourvest 12.5% carried interest on secondary investments or co-investments after 8% hurdle
Underlying fund fees TBD depending on investment, assume 2 and 20.

I know private equity is not a very BH thing to do, so please don't derail the thread with general anti-PE bias. I am comfortable with PE in general.

I probably won't do this but curious to hear from anyone that has.

To try to answer directly.

It is a better time to invest in PE than say 2022. Cycle has turned, companies are under pressure, valuations will be more conservative.

PE industry is stuck with a huge number of portfolio cos they cannot IPO or sell. That will tend to push valuations for new investors downwards (when these businesses raise further funding rounds (VC money) or do secondary buyouts (to LBO funds).

If you can get comfortable with the fees, and with the taxes, then this is not a bad investment.

Which is different than saying it is a good investment. The PE industry cannot generate the returns it has historically. The quantum of money flowing into the sector, all told, is several times what it was in the early 2000s. Barring a huge shakeout of 1970s sort of character, returns will be much closer to that of ordinary bonds and equities.

Private credit has been a boom sector. Every manager has done well. I know little about it, but according to a poster here who seemed to know it, it is likely that returns will get seriously reduced (they were making LBO (equity) returns on debt investments). So the market inefficiency is being squeezed out.

The wealth of academic evidence says PE does not outperform, and particularly does not do so post fees ie for the retail investor.

The diversification argument is somewhat suspect. Alex686 is an expert on this. But basically they use lagging valuations of their portfolios (like a Real Estate fund) so the NAV doesn't track market moves immediately. But with a lag, it will. You are not gaining real diversification.

Nonetheless it could be "worth a punt".

[nisiprius]

...it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

It's not a mutual fund, and it's not an ETF. It's not like the familiar "Vanguard funds" we discuss in the forum. Mutual funds have daily liquidity, ETFs have minute-to-minute liquidity. If your online statement says your holdings are worth $12,345 you can click a button, confident that you can sell it overnight or in seconds, and that you will end up with something pretty close to $12,345 in cash money, and you can do this right away, any time you like. Private equity is sold to wealthy investors, and one reason it's restricted is because it's assumed they can deal with illiquid investments that can't be sold quickly.

The fact that it is Vanguard making a push into offering private equity carries exactly zero weight for me; I'm a Boglehead, not a Vanguardhead.

Private equity is an asset class with nothing equivalent to an index fund, nothing equivalent to passive investing.

The investments are illiquid, so you don't know how much to trust the declared valuation of your holding, of category statistics, or alleged "indexes."* Everything I've read about private equity (PE), even from boosters, warns that it's all about the individual skill of the individual fund manager. The impressive results from the "best" firms are not typical, so you need to have personal skill in judging which are the good ones.

There is a good deal of argument back and forth over whether or not private equity is all that different from (public) small-cap value. The fact that it can even be asked should give us pause, given that small-cap value is easy, cheap, and available in mutual funds and ETFs with daily liquidity and the protections of the Investment Company Act of 1940. Private equity better be very different and a lot better. One example of an argument from the skeptical side is: Private Equity: The Emperor Has No Clothes.



Finally, there are plausible arguments for how stock market investing performs a social good by aiding the growth of profitable businesses that create value. What is the argument for private equity being good for anybody but the investors? I'm sure there is one, but I haven't happened to see it. What are the well-known big success stories of failing companies who were rescued by private equity investment and are now healthy, growing businesses? I'm sure there must be, but I can't think of any great examples, and I can think of companies that went sour after being acquired by PE firms. Toys-R-Us, to name one.

*You can find "indexes" nowadays for everything, but the indexes are only as reliable as the methodology for determining market value.

[folkher0]

There is a good deal of argument back and forth over whether or not private equity is all that different from (public) small-cap value. The fact that it can even be asked should give us pause, given that small-cap value is easy, cheap, and available in mutual funds and ETFs with daily liquidity and the protections of the Investment Company Act of 1940. Private equity better be very different and a lot better. One example of an argument from the skeptical side is: Private Equity: The Emperor Has No Clothes.

Anyone considering public small-value as a proxy for private equity should dive into it a little before making a decision. The concept is that private equity tends to flow towards smaller companies with a favorable price. On a different thread I asked about this and was pointed to an opinion piece by Swedroe which referenced a 2020 paper by Eric Stafford describing how a carefully constructed portfolio using select small-cap value securities (not an index or mutual fund) leveraged up to 2x had returns similar to an index of leveraged buy-outs, which is a subset of private equity (doesn't include venture capital, for instance).

There is a fair bit of commentary in the manuscript that describes how simply using SCV as an asset class probably doesn't really approximate the return of leveraged buy-outs.

It would seem a bit simplistic to think that buying a highly liquid, relatively low cost marketable security would really behave much like much higher cost, illiquid investments.

[Valuethinker]

There is a good deal of argument back and forth over whether or not private equity is all that different from (public) small-cap value. The fact that it can even be asked should give us pause, given that small-cap value is easy, cheap, and available in mutual funds and ETFs with daily liquidity and the protections of the Investment Company Act of 1940. Private equity better be very different and a lot better. One example of an argument from the skeptical side is: Private Equity: The Emperor Has No Clothes.

Anyone considering public small-value as a proxy for private equity should dive into it a little before making a decision. The concept is that private equity tends to flow towards smaller companies with a favorable price. On a different thread I asked about this and was pointed to an opinion piece by Swedroe which referenced a 2020 paper by Eric Stafford describing how a carefully constructed portfolio using select small-cap value securities (not an index or mutual fund) leveraged up to 2x had returns similar to an index of leveraged buy-outs, which is a subset of private equity (doesn't include venture capital, for instance).

There is a fair bit of commentary in the manuscript that describes how simply using SCV as an asset class probably doesn't really approximate the return of leveraged buy-outs.

It would seem a bit simplistic to think that buying a highly liquid, relatively low cost marketable security would really behave much like much higher cost, illiquid investments.

I don't have time to read the linked right now (thank you, though!) but just intuitively PE would resemble small cap investing with a profitability screen.

That is, I don't imagine too many buyout funds invest in businesses that are not profitable at the EBIT level. At the Pre Tax level, perhaps more so - ie due to overleveraged balance sheets. But generally in buyouts what you want is debt capacity, and that comes from positive EBITDA (and be suspicious of a business which is EBITDA positive but not EBIT positive) and cash generation.

Growth capital would be a little different - a business rolling out a new store or restaurant franchise will lose more money the faster it rolls out.

I think this is why, despite the size anomalies, it might be appropriate to compare LBO funds to a benchmark of S&P500, non financials, with an equivalent level of leverage.

Venture Capital is different again and yes, many or most of their investments might be loss-making. The equivalent of Small Cap Growth funds.

The documentary (Netflix) about WeWork and Masa Song (sp?) of Softbank is instructive on how having more money to deploy, in venture/ growth capital, can lead to monumental mistakes. Also about the problems of highly charismatic founders who become convinced of their own genius.

[folkher0]

There is a good deal of argument back and forth over whether or not private equity is all that different from (public) small-cap value. The fact that it can even be asked should give us pause, given that small-cap value is easy, cheap, and available in mutual funds and ETFs with daily liquidity and the protections of the Investment Company Act of 1940. Private equity better be very different and a lot better. One example of an argument from the skeptical side is: Private Equity: The Emperor Has No Clothes.

Anyone considering public small-value as a proxy for private equity should dive into it a little before making a decision. The concept is that private equity tends to flow towards smaller companies with a favorable price. On a different thread I asked about this and was pointed to an opinion piece by Swedroe which referenced a 2020 paper by Eric Stafford describing how a carefully constructed portfolio using select small-cap value securities (not an index or mutual fund) leveraged up to 2x had returns similar to an index of leveraged buy-outs, which is a subset of private equity (doesn't include venture capital, for instance).

There is a fair bit of commentary in the manuscript that describes how simply using SCV as an asset class probably doesn't really approximate the return of leveraged buy-outs.

It would seem a bit simplistic to think that buying a highly liquid, relatively low cost marketable security would really behave much like much higher cost, illiquid investments.

I don't have time to read the linked right now (thank you, though!) but just intuitively PE would resemble small cap investing with a profitability screen.

That is, I don't imagine too many buyout funds invest in businesses that are not profitable at the EBIT level. At the Pre Tax level, perhaps more so - ie due to overleveraged balance sheets. But generally in buyouts what you want is debt capacity, and that comes from positive EBITDA (and be suspicious of a business which is EBITDA positive but not EBIT positive) and cash generation.

Growth capital would be a little different - a business rolling out a new store or restaurant franchise will lose more money the faster it rolls out.

I think this is why, despite the size anomalies, it might be appropriate to compare LBO funds to a benchmark of S&P500, non financials, with an equivalent level of leverage.

Venture Capital is different again and yes, many or most of their investments might be loss-making. The equivalent of Small Cap Growth funds.

The documentary (Netflix) about WeWork and Masa Song (sp?) of Softbank is instructive on how having more money to deploy, in venture/ growth capital, can lead to monumental mistakes. Also about the problems of highly charismatic founders who become convinced of their own genius.

Excellent points. Stafford makes similar statements in his manuscript.

[2commaBH]

Bumping this thread, as I am considering an investment into the 2024 vintage. Anyone doing this? Details as I understand them:

Fund of funds structure, primary/secondary investments into other funds/firms with some co-investment opportunities
3 year investment period, 14 year fund life plus extensions
Option for US master or offshore feeder (K-1 or PFIC)
Harbourvest sub line smooths capital call frequency to 3-4 times annually
$500k minimum commitment
Vanguard annual fee of .30 basis points on committed capital
Harbourvest annual fee of .20 basis points on committed capital
Harbourvest 12.5% carried interest on secondary investments or co-investments after 8% hurdle
Underlying fund fees TBD depending on investment, assume 2 and 20.

I know private equity is not a very BH thing to do, so please don't derail the thread with general anti-PE bias. I am comfortable with PE in general.

I probably won't do this but curious to hear from anyone that has.

Thanks for the well-intentioned replies but hoping to focus back on my question, which was to hear experiences from those that have invested in the VG Harbourvest PE funds. Thanks!

[Rex66]

The vast majority of my friends who have invested in PE have had poor results, some really bad. I’m not aware of any reason why this PE offer is better than others.

[nisiprius]

Anyone considering investing in PE through Vanguard ought to listen to:

A Candid Discussion with Ted Aronson about Vanguard's Push into Private Equity...

Transcript

Snippets. Tiny snippets.

Rick Ferri: They’ve gone out and picked a company called Harbourvest....

Ted Aronson: First and foremost, I think Jack is spinning in his grave.... I think they will do a good job of providing private equity, however when their fees they’ll have to add on top of the costs of Harbourvest and all the other related charges, I don’t think they’ll have anything that’s particularly competitive...

Ferri: .... Number one the firm that they chose, Harbourvest has 75 billion or so under management.... Vanguard is roughly an 8 trillion dollar company and Vanguard is managing maybe 4.5 trillion of equity in total and they were talking about taking– the numbers don’t make sense–but you know up to some percentage of that moving it over slowly to private equity. And the reason I say it doesn’t make sense is because Harbourvest is only managing, like I said, 75 billion and I mean just a little bit of movement by Vanguard and shareholders over to this fund is going to flood Harbourvest.
And I don’t think it will happen because I don’t think that Vanguard and Harbourvest will allow this flood to occur. So we’re really talking about a small amount of money from Vanguard investors actually going into this product.

[Maybe Vanguard's idea is] maybe 20 years from now private equity and exact access to world-class managers for the average investor will look very much like indexing did over the course of 1975 to 1995. But how can you do that? I mean how can you pour so much money into private equity and make it kind of index-like and expect to get the same return?

Aaronson: Rick, you really can’t.... It’s an impossibility; it just can’t be done. I think in all the private equity they found something like a trillion dollars of dry powder of committed capital, something like that. So, and those are the biggest numbers that have ever been seen. So can you imagine throwing a couple other trillion on top of that chasing the same deals? I don’t think so.

Ferri: ...Okay, so first Fran was talking about Harbourvest has been getting 700 to 800 basis points over the public markets. That’s what they’ve been saying, but you know what Vanguard’s forward-looking estimates to our investors– and this is just quoting him– get between 300 to 400 basis points or three to four percent more than public equity. Wow, really? I mean everybody’s going to get that?

Aronson: Well my first reaction to what you said Rick is bingo, because of course no one’s going to get it. It’s silly. Could they do 300 or 400 over the next couple of years before fees? Maybe. Fees will reduce it to maybe 100 basis points. So now we’re talking about public markets plus a little alpha, if you will, thrown in. Let’s call it alpha because that’s what active managers are all about. 300 or 400 is silly; 700 or 800 may be true but that was when Harbourvest was small and that’s when there were a limited number of deals. I’m not saying there aren’t smart enough people to get returns like that. I would love to run out and hire them when they’re young and they’re new. But because they’re young and they’re new, nobody knows about it or very few people do, so the return expectations are in my opinion scary and silly as you note.

Private equity returns are very close to lower cap value returns, at least historically and that’s absolutely true with one addition — and that’s leverage. Private equity deals usually entail leverage, not always wild amounts of leverage, but some leverage. And if you do that to things like mid cap value returns you get private equity returns.

[afan]

At one point Vanguard had suggested that it was entering PE to serve the relatively small fraction of its customers who wanted and could afford it. They did not present it as a mass market offering. They said that some of their higher networth customers were going elsewhere in order to have access to PE. Even if the requirements are not adjusted up to account for inflation, those who would be willing to commit that much money for that long will be tiny fragment of Vanguards clientele.

In the interview, Vanguard appears quite confident in performance prediction. More so than I think research has justified. Unless they are confining themselves to VC and they will be able to continually pick winning PE funds.

I can imagine that PE broadly could become a larger share of the equity market if a player like Vanguard can force down prices to be competitive with public markets. Absent Vanguard, evidence suggests that the PE market as a whole provides returns net of fees that are similar to public markets but with far less liquidity. Within that, the better net-of-fee returns go to institutional investors and billionaires, who can negotiate fees that are well below average and work with the most successful PE firms to exploit what performance predictability there may be. Small investors cannot play this game, at least, not so far.

Given the limited information, illiquidity and volatility of markets, it may take many years to learn whether someone with "only" $10M of investable assets should jump on board, even at Vanguard prices.

I do worry that the unchanging threshold for assets to qualify will entice a greater number of mass market people who should not be locking up their money for nearly as long as PE requires.

[Tramper Al]

How about Private Equity ETFs with more liquidity? Vanguard search lists PSP, PEX etc. Are they worth it?

I have an allocation to PSP, though many would consider the % to be very small. Of the handful of asset classes in the "Ivy League endowment" style, this is the available vehicle I consider furthest removed from the intent (i.e. actual private equity). It's maybe analogous to a REITs fund if your intent were to own actual real estate. And the liquidity, spread, and market maker of this particular ETF make it a real drag to rebalance, to be honest. I occasionally look around for a replacement.

[Hogan773]

Appreciate the new discourse on this above

Feels very very expensive to me (fees for Harbourvest layered onto typical PE fees) and I also question whether through Harbourvest, we are getting access to the "best" firms in any case. Almost 3% fees plus carried interest creates a high hurdle for these investments to beat the small cap public equity market.

Plus, getting K1s is a huge pain in the butt IMO. I did it for 12 years awhile back and it always made tax prep more complicated

And 500K to commit here is substantial

[2commaBH]

Appreciate the new discourse on this above

Feels very very expensive to me (fees for Harbourvest layered onto typical PE fees) and I also question whether through Harbourvest, we are getting access to the "best" firms in any case. Almost 3% fees plus carried interest creates a high hurdle for these investments to beat the small cap public equity market.

Plus, getting K1s is a huge pain in the butt IMO. I did it for 12 years awhile back and it always made tax prep more complicated

And 500K to commit here is substantial

My understanding is that the underlying fund fees for the VG Harbourvest offering are not "typical PE fees" but rather closer to 1% than 2%.

[ge1]

I have other private equity investments, so not generally against it, but I think there are other investment options right now in the private credit world that offer a better risk/reward profile. Also $500k is substantial, I wouldn‘t do that unless I had 15m or so.

[Hogan773]

I think it's pretty well known...if you want to get rich in PE, be the one who runs the funds and get paid 2 and 20. If you're an LP investor sure you might make money, but the question is did you make more after all fees and on a risk and liquidity adjusted basis

[abuss368]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

Hi Hogan773 -

In some respects, I am not surprised to read this.

I listened to a Jack Brennan interview (former CEO of Vanguard -> Jack Bogle’s hand picked successor) where Mr. Brennan stated in his opinion the private markets were going to be the next big thing with many changes (access, lower fees, etc.) possible.

If you do decide to have the call with Vanguard to hear them out, please consider providing an update to the Bogleheads.

Best.
Tony

[abuss368]

I think it's pretty well known...if you want to get rich in PE, be the one who runs the funds and get paid 2 and 20. If you're an LP investor sure you might make money, but the question is did you make more after all fees and on a risk and liquidity adjusted basis

Hi Hogan773 -

Getting paid 2 and 20 is a bargain compared to what Dave charges for his Cayman Islands Hedge Fund.

It is how he cash flows that Lear Jet (or is it a Gulf Stream)?

Best.
Tony

[2commaBH]

I just got an email where Vanguard would have a call arranged to pitch me a PE option

I didn't realize VG did this. In Googling a bit it seems like they offer a Harbourvest option or something. Is this a Fund of Funds?

Anyone have the broad deets here? Knee jerk instinct is sort of like Groucho Marx...I don't really want to be invested in any PE option that actually wants me haha. Assume fees, lack of liquidity, and K1 crap I would need to mess with every year.

That said if they have figured out a better mousetrap I don't want to overlook the opportunity just based on my knee jerk instinct if that is a dated or incorrect view

Hi Hogan773 -

In some respects, I am not surprised to read this.

I listened to a Jack Brennan interview (former CEO of Vanguard -> Jack Bogle’s hand picked successor) where Mr. Brennan stated in his opinion the private markets were going to be the next big thing with many changes (access, lower fees, etc.) possible.

If you do decide to have the call with Vanguard to hear them out, please consider providing an update to the Bogleheads.

Best.
Tony

I had a good meeting with them and provided some additional details above. We are probably passing as I am seeking a top quartile fund rather than a fund of funds option, but I came away impressed.