Vanguard Broadens Reach With Entry Into Private Equity

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Vanguard Broadens Reach With Entry Into Private Equity

Post by integrity »

From today's WSJ: https://www.wsj.com/articles/vanguard-b ... 1580909400

Hopefully this is not a repost.
This "exploration" into PE was announced months ago but the decision appears to be formalized now.
Vanguard Group is launching a private-equity fund, a striking move for the money-management giant that built a household brand on the back of low-cost funds for everyday investors.

The new fund is part of Chief Executive Tim Buckley’ s push to broaden the Malvern, Pa.-based company’s appeal as a financial adviser for larger investors. With Mr. Buckley at the helm, the firm with $6.2 trillion in assets under management has pressed beyond the index-fund business it is best known for and further into the advisory business. It has also added more actively managed funds to its financial lineup.

Private-equity funds are typically more opaque and complex than stock and bond funds. They are also more expensive, commanding as much as 2% management fees and a 20% share of profits.

Vanguard has picked the Boston firm HarbourVest Partners to manage the new private-equity fund, said people familiar with the matter. Both firms expect to raise hundreds of millions of dollars for the fund, the people said.

At first, the private-equity fund will only be offered to endowments, foundations and other institutions that have appointed Vanguard as a financial adviser. Vanguard expects to open private equity in the future to wealthy individuals who use its financial-advisory services, the people familiar said.

Vanguard became a behemoth with ultralow-cost strategies and funds mirroring indexes.

As Mr. Buckley takes Vanguard into new areas, the challenge he faces is convincing customers that the firm will stay true to the vision of its founder, Jack Bogle, who advocated keeping investing simple and dirt-cheap for everyday individuals. The index pioneer died a year ago.

“I can’t say it’s for all clients, but we think for many clients, it’s suitable,” Mr. Buckley said when discussing private equity in an interview. He said the entry into private equity doesn’t change what Vanguard has done all along.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Scooter57 »

That sound you hear is John Bogle spinning in his grave. <sigh>
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Svensk Anga »

Scooter57 wrote: Wed Feb 05, 2020 9:29 am That sound you hear is John Bogle spinning in his grave. <sigh>
Disagree. I think Bogle would approve of expanding Vanguard's reach into all available stocks, even if they are not publicly traded, provided it is done at low cost.

With the trend of more growth of new companies occurring prior to IPO, it may be necessary for investors to have a slice of private equity to get their portion of the available equity return. I will seriously consider adding this when/if it becomes available to retail investors.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by nisiprius »

The name HarbourVest evokes echoes of what Bogle called his biggest mistake:
His worst bet, he says, was merging the mutual fund company he was running in the 1960s and early ’70s, Wellington Management Co., with a go-go fund management group. It cost him $1 billion in assets and his job.

Bogle was hired by Wellington Management, which did the investing for the conservative Wellington Fund, straight out of college in 1951. He worked his way up to executive vice president by 1965.

Shortly after, hoping to keep his fund alive during the “go-go era,” he initiated a merger in 1966 with investment counseling firm Thorndike, Doran, Paine & Lewis. The small Boston firm was owned by four young partners and managed the hot Ivest Fund, a $30 million aggressive mutual fund, among others.
But perhaps it is a shallow judgement to say "stay away from Boston firms with names ending in -vest."

I wonder if the Vanguard Managed Payout fund is going to invest in this? They seem to go in for all the latest trends...
Last edited by nisiprius on Wed Feb 05, 2020 10:28 am, edited 1 time in total.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by fredflinstone »

I'm excited to see the debut of the Vanguard Cryptocurrency Fund.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by firebirdparts »

If the performance of this fund or funds becomes public knowledge, and about 10 years go by, we'll form an opinion about what's going on over there. The stories you hear about PE are the nutty ones. That's what makes the news. I certainly am not in a hurry to get into it.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by anil686 »

I guess I will take the other side of this. Charles Ellis and Burt Malkiel in the Elements of Investing give a warning to DIY investors to avoid private equity. I think that is really good advice. However, with the scale that VG has, they may be able to find outstanding PE managers at a fair-er price for performance that may benefit investors. I would not invest in such a fund, but I would not be surprised if VG is able to find very good managers in comparison to other institutional investors. JMO though...
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Scooter57 »

Svensk Anga wrote: Wed Feb 05, 2020 10:08 am
Scooter57 wrote: Wed Feb 05, 2020 9:29 am That sound you hear is John Bogle spinning in his grave. <sigh>
Disagree. I think Bogle would approve of expanding Vanguard's reach into all available stocks, even if they are not publicly traded, provided it is done at low cost.

With the trend of more growth of new companies occurring prior to IPO, it may be necessary for investors to have a slice of private equity to get their portion of the available equity return. I will seriously consider adding this when/if it becomes available to retail investors.
Private equity is all about paying a huge premium to let supposed geniuses pick stocks,except the stocks aren't traded on the open market and don't have to conform to the minimal SEC requirements for disclosure. Last I heard, Bogle was about keeping expenses low and NOT trying to beat the market with exotic stock picking.

This is Vanguard chasing more assets under management with gimmick after gimmick and getting farther and farther away from the kind of company they were back when Bogle ran things.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Svensk Anga »

Scooter57 wrote: Wed Feb 05, 2020 12:49 pm
Private equity is all about paying a huge premium to let supposed geniuses pick stocks,except the stocks aren't traded on the open market and don't have to conform to the minimal SEC requirements for disclosure. Last I heard, Bogle was about keeping expenses low and NOT trying to beat the market with exotic stock picking.

This is Vanguard chasing more assets under management with gimmick after gimmick and getting farther and farther away from the kind of company they were back when Bogle ran things.
The way private equity works currently is much as you describe. It does not need to remain this way. Plain ole equity mutual funds prior to 1976 used to be about paying supposed experts to pick stocks better than you could. I don't see why a private equity fund could not be run at low cost. The funded companies might prefer such a low cost fund as it would mean that more of the fund raising proceeds could go to the business and less to the fund managers. A low cost fund would likely have to give up selectivity on what stocks they buy. It might not matter if it can get its share of the winning stocks, much like index investing in the public markets.

One of the reasons that the small cap premium is currently underperforming versus history is that much of the growth that used to occur in that space is now occurring in private equity. I would hate to see retail investors permanently shut out of this segment. In fine capitalist tradition, I think Vanguard has seen an unfilled niche or market inefficiency and is moving to exploit it. It might well impair the future income of those private equity fund managers as it has done for active mutual fund companies. More of this segment's return might go to investors (and to Vanguard execs, it is to be admitted).
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by firebirdparts »

Scooter57 wrote: Wed Feb 05, 2020 12:49 pm Private equity is all about paying a huge premium to let supposed geniuses pick stocks,except the stocks aren't traded on the open market and don't have to conform to the minimal SEC requirements for disclosure.
The initial Venture stage is you pick stocks that don't even exist. Secrecy and lying certainly makes a better story later, like say the story of Theranos, but even if you disclosed everything, the expectation at that stage is that you're losing money as fast as you can, but you have an excuse for that.

You're looking for a guy that can pick pipe dreams. I think Vanguard is just the people to go poking around and see what they find.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Scooter57 »

What's next? Vanguard's 3x inverse leveraged gold ETF?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

Svensk Anga wrote: Wed Feb 05, 2020 10:08 am
Scooter57 wrote: Wed Feb 05, 2020 9:29 am That sound you hear is John Bogle spinning in his grave. <sigh>
Disagree. I think Bogle would approve of expanding Vanguard's reach into all available stocks, even if they are not publicly traded, provided it is done at low cost.

With the trend of more growth of new companies occurring prior to IPO, it may be necessary for investors to have a slice of private equity to get their portion of the available equity return. I will seriously consider adding this when/if it becomes available to retail investors.

+1.

PE needs to be democratized in so many ways.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by columbia »

I wouldn’t expect is to be available to the plebes anytime soon; probably never below an initial $1,000,000 investment. Maybe even 5x-10x that.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

columbia wrote: Wed Feb 05, 2020 5:12 pm I wouldn’t expect is to be available to the plebes anytime soon; probably never below an initial $1,000,000 investment. Maybe even 5x-10x that.
My guess is they'll start with the typical "qualified investor" / HNWI mark of $5M liquid that the other PE I invest in uses.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by simplesimon »

There are plenty of huge privately held companies that aren't included in the Total Stock Market Index that nobody is talking about. People here seem to care only about getting into the next Facebook or Uber (which in their infancy wouldn't be invested in by PE firms anyway).

The private universe is way bigger than the public and people would not be able to wade through all that data themselves. There's not going to be a "Total Private Stock Market Index". You may as well be speculating on public fund managers.

Allowing average investors into PE is great for PE firms because they get access to capital. It would be bad for the average investor themselves.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

simplesimon wrote: Wed Feb 05, 2020 5:30 pm There are plenty of huge privately held companies that aren't included in the Total Stock Market Index that nobody is talking about. People here seem to care only about getting into the next Facebook or Uber (which in their infancy wouldn't be invested in by PE firms anyway).

The private universe is way bigger than the public and people would not be able to wade through all that data themselves. There's not going to be a "Total Private Stock Market Index". You may as well be speculating on public fund managers.

Allowing average investors into PE is great for PE firms because they get access to capital. It would be bad for the average investor themselves.
It all depends on what kind of PE they're targeting.

Family back office is very different from, say, private infrastructure, from vulture capitalists.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by columbia »

watchnerd wrote: Wed Feb 05, 2020 5:28 pm
columbia wrote: Wed Feb 05, 2020 5:12 pm I wouldn’t expect is to be available to the plebes anytime soon; probably never below an initial $1,000,000 investment. Maybe even 5x-10x that.
My guess is they'll start with the typical "qualified investor" / HNWI mark of $5M liquid that the other PE I invest in uses.
Interesting and makes sense.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by sarabayo »

Svensk Anga wrote: Wed Feb 05, 2020 3:56 pm
Scooter57 wrote: Wed Feb 05, 2020 12:49 pm
Private equity is all about paying a huge premium to let supposed geniuses pick stocks,except the stocks aren't traded on the open market and don't have to conform to the minimal SEC requirements for disclosure. Last I heard, Bogle was about keeping expenses low and NOT trying to beat the market with exotic stock picking.

This is Vanguard chasing more assets under management with gimmick after gimmick and getting farther and farther away from the kind of company they were back when Bogle ran things.
The way private equity works currently is much as you describe. It does not need to remain this way. Plain ole equity mutual funds prior to 1976 used to be about paying supposed experts to pick stocks better than you could. I don't see why a private equity fund could not be run at low cost. The funded companies might prefer such a low cost fund as it would mean that more of the fund raising proceeds could go to the business and less to the fund managers. A low cost fund would likely have to give up selectivity on what stocks they buy. It might not matter if it can get its share of the winning stocks, much like index investing in the public markets.

One of the reasons that the small cap premium is currently underperforming versus history is that much of the growth that used to occur in that space is now occurring in private equity. I would hate to see retail investors permanently shut out of this segment. In fine capitalist tradition, I think Vanguard has seen an unfilled niche or market inefficiency and is moving to exploit it. It might well impair the future income of those private equity fund managers as it has done for active mutual fund companies. More of this segment's return might go to investors (and to Vanguard execs, it is to be admitted).
How would a passively managed private equity fund work? Passively managed index mutual funds follow an index, and an index is some set of purchasable items weighted by some metric, usually market capitalization. How would that work with private equity? Unlike with publicly listed companies, there's no price discovery going on so there's no agreed-upon NAV of anything, right? So market capitalization weighting seems to become a meaningless concept... am I missing something?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

sarabayo wrote: Wed Feb 05, 2020 6:23 pm

How would a passively managed private equity fund work? Passively managed index mutual funds follow an index, and an index is some set of purchasable items weighted by some metric, usually market capitalization. How would that work with private equity? Unlike with publicly listed companies, there's no price discovery going on so there's no agreed-upon NAV of anything, right? So market capitalization weighting seems to become a meaningless concept... am I missing something?
I don't think Vanguard has said anything about it being passive, have they?

My guess is that it would be actively managed, at a high ER relative to passive funds, but maybe a modest ER compared to other PE alternatives.

When I worked in VC world, 2-2.5% was a pretty typical fee for the VC funds to charge for AUM. If Vanguard can do it for less, they could gain some market share among institutional investors.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by sarabayo »

watchnerd wrote: Wed Feb 05, 2020 6:34 pm
sarabayo wrote: Wed Feb 05, 2020 6:23 pm How would a passively managed private equity fund work? Passively managed index mutual funds follow an index, and an index is some set of purchasable items weighted by some metric, usually market capitalization. How would that work with private equity? Unlike with publicly listed companies, there's no price discovery going on so there's no agreed-upon NAV of anything, right? So market capitalization weighting seems to become a meaningless concept... am I missing something?
I don't think Vanguard has said anything about it being passive, have they?
No, but the person I was responding to said "I don't see why a private equity fund could not be run at low cost" like "plain ole equity mutual funds prior to 1976". I assumed that meant going passive, since 1976 was when the first index fund was created by John Bogle. Maybe I misunderstood?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by KyleAAA »

Seems like a good idea to me. The size of the private markets is growing relative to the side of the public markets. The investable universe here is huge. I'm not sure why a total market investor wouldn't want exposure if they could get it at a reasonable cost.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by simplesimon »

watchnerd wrote: Wed Feb 05, 2020 5:37 pm
simplesimon wrote: Wed Feb 05, 2020 5:30 pm There are plenty of huge privately held companies that aren't included in the Total Stock Market Index that nobody is talking about. People here seem to care only about getting into the next Facebook or Uber (which in their infancy wouldn't be invested in by PE firms anyway).

The private universe is way bigger than the public and people would not be able to wade through all that data themselves. There's not going to be a "Total Private Stock Market Index". You may as well be speculating on public fund managers.

Allowing average investors into PE is great for PE firms because they get access to capital. It would be bad for the average investor themselves.
It all depends on what kind of PE they're targeting.

Family back office is very different from, say, private infrastructure, from vulture capitalists.
Right, isn’t this like trying to pick the winning fund manager or sector? If average investors aren’t advised to do this with regular mutual funds they have no hope in PE.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by KyleAAA »

sarabayo wrote: Wed Feb 05, 2020 7:37 pm
watchnerd wrote: Wed Feb 05, 2020 6:34 pm
sarabayo wrote: Wed Feb 05, 2020 6:23 pm How would a passively managed private equity fund work? Passively managed index mutual funds follow an index, and an index is some set of purchasable items weighted by some metric, usually market capitalization. How would that work with private equity? Unlike with publicly listed companies, there's no price discovery going on so there's no agreed-upon NAV of anything, right? So market capitalization weighting seems to become a meaningless concept... am I missing something?
I don't think Vanguard has said anything about it being passive, have they?
No, but the person I was responding to said "I don't see why a private equity fund could not be run at low cost" like "plain ole equity mutual funds prior to 1976". I assumed that meant going passive, since 1976 was when the first index fund was created by John Bogle. Maybe I misunderstood?
The first index fund was created in 1972, not by John Bogle.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

simplesimon wrote: Wed Feb 05, 2020 7:48 pm

Right, isn’t this like trying to pick the winning fund manager or sector? If average investors aren’t advised to do this with regular mutual funds they have no hope in PE.
It can be totally different, depending on the kind...that's my point.

Example:

I have a PE investment in private infrastructure. The minimum buy-in to this toll bridge is $100 million. The PE firm collects the pool of money from investors and manages the cashflow.

There is no "picking" involved other than evaluating things like cash flow, cost of money, balance sheets, etc. The toll bridge doesn't have to beat other toll bridges....it has a monopoly on that road.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Chrismax »

$3k minimum and .09% expense ratio. Lets go.

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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Svensk Anga »

sarabayo wrote: Wed Feb 05, 2020 7:37 pm
No, but the person I was responding to said "I don't see why a private equity fund could not be run at low cost" like "plain ole equity mutual funds prior to 1976". I assumed that meant going passive, since 1976 was when the first index fund was created by John Bogle. Maybe I misunderstood?
The proposed private equity fund need not be passive, just low cost. Vanguard does active equity funds much cheaper than the industry norms. (See Primecap, Wellington, Wellesley, etc. ) I don't see why they couldn't in this space as well. How well a low cost, active PE fund would perform is another matter. My impression is that one needs connections to get access to the most promising deals.

The first retail index fund was not all that cheap in ER compared to what we enjoy today. It was cheaper than active for its time though and that provided a performance edge against the average fund. Ultra low cost from increasing economies of scale came later. PE funds could evolve the same way.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by james22 »

I'm curious, but hard to see how it'd improve upon Berkshire as "the perfect private equity model" (Henry Kravis).
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

james22 wrote: Wed Feb 05, 2020 11:25 pm I'm curious, but hard to see how it'd improve upon Berkshire as "the perfect private equity model" (Henry Kravis).
Because Berkshire is subject to market beta.

Vanguard could create PE offerings that aren't publicly traded.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by sarabayo »

KyleAAA wrote: Wed Feb 05, 2020 7:51 pm The first index fund was created in 1972, not by John Bogle.
https://en.wikipedia.org/wiki/Index_fund#Origins
Thanks, never heard about this one.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by james22 »

watchnerd wrote: Thu Feb 06, 2020 12:49 am
james22 wrote: Wed Feb 05, 2020 11:25 pm I'm curious, but hard to see how it'd improve upon Berkshire as "the perfect private equity model" (Henry Kravis).
Because Berkshire is subject to market beta.

Vanguard could create PE offerings that aren't publicly traded.
Owning Berkshire gives you partial ownership of Berkshire's private companies.

Owning Vanguard's publicly traded fund will give you partial ownership of the fund's private companies.

Berkshire's float (in the form of cash and publicly traded shares to fund acquisitions) should give it a performance advantage over the Vanguard fund, with a ~$229 minimum and 0% expense ratio.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by simplesimon »

watchnerd wrote: Wed Feb 05, 2020 8:58 pm
simplesimon wrote: Wed Feb 05, 2020 7:48 pm

Right, isn’t this like trying to pick the winning fund manager or sector? If average investors aren’t advised to do this with regular mutual funds they have no hope in PE.
It can be totally different, depending on the kind...that's my point.

Example:

I have a PE investment in private infrastructure. The minimum buy-in to this toll bridge is $100 million. The PE firm collects the pool of money from investors and manages the cashflow.

There is no "picking" involved other than evaluating things like cash flow, cost of money, balance sheets, etc. The toll bridge doesn't have to beat other toll bridges....it has a monopoly on that road.
I see what you’re saying but what about other toll bridges in the investment universe? I feel like very few people here are thinking of investing in toll bridges. Even now that you explain it does anybody want to do that?

Does anybody here invest in bonds on margin?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Valuethinker »

Some observations, derived from Swensen and other authors.

- there is a rich literature about PE returns, see Steve Kaplan's work in particular - I believe he wrote about PE in Journal of Economic Perspectives (a fantastic resource for anyone delving into an area of economic research at a non-technical level)

- basic conclusions from Swensen:

-- there is technology venture capital. A handful of partnerships (Like Kleiner, Perkins - the granddaddy of them all) collect almost all of the outperformance. The median fund underperforms the NASDAQ (even at a pre fee level, I believe). Those handful are *not* accessible to general investors - you'd have to be a Bill Gates or the private office of some other CEO of a tech company to get access (probably also Stanford U private endowment). When they raise a new fund, the existing Limited Partners (who will have made 2-3x their initial investment over 10-12 years) "roll" their money into the new partnership

-- then there are buyouts - LBO. The evidence (as noted by Larry Swedroe in various posts) is pretty clear that the average LBO fund, after fees (the norm is the 2 & 20 - 2% pa on committed (not drawn) funds + 20% Carried Interest ("carry") performance fee), underperforms an equivalently leveraged S&P 500 fund.

Swensen basically says you have to have access to good managers due to previous investments and a good investor reputation (an LP who does not make big waves) - such as Yale Endowment. And you have to have superior manager selection skills - some PE managers will outperform fund after fund - there is persistence of skill. (There have been some academic rejoinders that that persistence is illusory, but certainly Swensen as of publication date of his books, believed in it). He actually says if you do not believe you have skill in picking PE managers, you are better off not investing.

PE market right now


There's also plenty of evidence, as for example in the CLO funds which hold securitized LBO loans primarily, that the PE market is unbelievably hot right now. Multiples (the usual metric is EV/ EBITDA) which actually exceed multiples on quoted small companies (stock market listed). There has been a lot of money poured into "alternatives" in the last few years, primarily PE. Lower interest rates have allowed higher leverage on deals, thus increasing returns but in an auction environment which is super hot - equity has held its performance via leverage, paying ever higher prices. This will unwind at some point, and it won't be pretty.

Cyclical performance in PE

It is abundantly clear you need to be doing deals in economic downturns. For example Blackstone bought up housing development companies during the Crash. However the volume of deals done in a downturn is much smaller.

Barbarians at the Gate, the KKR deal for RJR Nabisco, is still the canonical example of overpaying in a hot market, and enduring lousy IRRs for years. I think Henry Kravis once said that the only thing he regretted about the RJR Nabisco deal was completing it - the firm then spent years in complex negotiations with creditors, etc.

KKR was then able to repeat the trick with the purchase of Texas Utilities - without checking, the PE firms investing wrote off something like USD 20 bn of equity invested, and turned the firm over to the lenders.

CLO Funds

Stuffed full of "cov lite" buyout loans offloaded by the banks (I've even heard of "no cov" loans i.e. loans without any additional protections for lenders. And one little known Japanese agricultural bank, Norinchukin, owns 10% of all CLOs out there (and 18% of the AAA tranches - think the Big Short). Watch this space.

Harborvest Partners

They've been around a long time and are respected in this space. However the fees-on-fees problem of a fund-of-funds is going to be a huge drag on investor returns. When PE yielded 15% IRRs, then 3% didn't look too bad, but when PE might give you 6-8%?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Tamarind »

I could see interest among private companies in getting access to funding from a source that would be more interested in owning the haystack than in the multiples a typical PE team drives toward. I don't think that's what Vanguard is currently proposing but would be an interesting future possibility.
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Vanguard Private Equity Fund

Post by like2read »

[Merged into existing discussion -- mod oldcomputerguy]

The WSJ reported this morning that Vanguard is launching a private equity fund.

Are you concerned that Vanguard may be veering off course?

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Re: Vanguard Private Equity Fund

Post by Grt2bOutdoors »

like2read wrote: Thu Feb 06, 2020 9:06 am The WSJ reported this morning that Vanguard is launching a private equity fund.

Are you concerned that Vanguard may be veering off course?

l2r
No. Vanguard is satisfying demand from its customers. Most likely they will roll this out on an institutional level first before they explore offering it to the retail masses.
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Re: Vanguard Private Equity Fund

Post by Stinky »

I expect that whatever Vanguard puts out to investors will be low cost, compared to the alternatives.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

james22 wrote: Thu Feb 06, 2020 5:15 am

Owning Vanguard's publicly traded fund will give you partial ownership of the fund's private companies.
Who said Vanguard's fund would be publicly traded?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

simplesimon wrote: Thu Feb 06, 2020 5:56 am
I see what you’re saying but what about other toll bridges in the investment universe? I feel like very few people here are thinking of investing in toll bridges. Even now that you explain it does anybody want to do that?
I do it.

My example wasn't hypothetical.

Both Blackrock and JP Morgan call out private infrastructure as an asset class in their 2020 forecasts.

We have about 10% of our net worth in various PE and angel VC investments.
Last edited by watchnerd on Thu Feb 06, 2020 9:27 am, edited 1 time in total.
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Re: Vanguard Private Equity Fund

Post by JoMoney »

Stinky wrote: Thu Feb 06, 2020 9:13 am I expect that whatever Vanguard puts out to investors will be low cost, compared to the alternatives.
:thumbsup

Vanguard also has commodity funds , "Market Neutral" funds , and a whole range of active funds.
The incentives for Vanguard as a company is to grow its market share and bring costs down. The index stock fund market is pretty saturated, with bulk of it at Vanguard. There's a lot more room to grown in other financial market areas. That doesn't mean those "investments" are good for investors, but at least for those that will use those products regardless, Vanguard is bringing prices down.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by donaldfair71 »

So long as my total market funds continue to cost the same as they do now, or cheaper, Vanguard can invest in anything it wants.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Valuethinker »

watchnerd wrote: Thu Feb 06, 2020 9:25 am
simplesimon wrote: Thu Feb 06, 2020 5:56 am
I see what you’re saying but what about other toll bridges in the investment universe? I feel like very few people here are thinking of investing in toll bridges. Even now that you explain it does anybody want to do that?
I do it.

My example wasn't hypothetical.

Both Blackrock and JP Morgan call out private infrastructure as an asset class in their 2020 forecasts.

We have about 10% of our net worth in various PE and angel VC investments.
Infrastructure is not a new asset class. There are a number of closed end funds listed in London (probably US PFIC rules make them prohibitive for US taxpayers).

If you surf their accounts you can get a sense of their expected IRRs on investments - on the order of 6-8% nominal, typically (return to equity). If the fund itself also uses leverage then you can in turn increase that.

Lower returns, but also lower risk, than your usual LBO investment.

The attraction of infrastructure is you can leverage it - debt to EV of 80%+ for a fully developed assets.

Angel Investing? If I had privileged access to a pool, say because I was a successful tech co exec (that had made money for VCs) then yes. Generally I imagine it would create hairy tax reporting problems? Plus having lived through the 2000-03 downturn - they didn't prove to be good investments. Most of the time subsequent rounds came in at highly dilutive valuations and crushed the seed stage angel investors. (I actually exited the last of those last year, so an 18 year holding period, during which time I just about broke even ;-)).
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by simplesimon »

watchnerd wrote: Thu Feb 06, 2020 9:25 am
simplesimon wrote: Thu Feb 06, 2020 5:56 am
I see what you’re saying but what about other toll bridges in the investment universe? I feel like very few people here are thinking of investing in toll bridges. Even now that you explain it does anybody want to do that?
I do it.
Yes but I gathered you're not the average investor. If PE was made available to everyone, many will get smoked.

What kind of reporting do you get and how often do you get it? What's your ROI? Holding period? How leveraged is the investment? How liquid are your shares? (Mainly rhetorical questions most people don't think about)
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Valuethinker »

Let me summarise this.

For most investors:

- if you want tech exposure buy the Nasdaq (or a US small cap tech fund)

- if you want equity exposure buy the S&P 500

- if you want to simulate PE factor exposure then a US small cap value fund should do it, and you would in fact be buying some businesses at cheaper prices than prevail in private markets right now. The main thing you won't get is the higher leverage, and that cuts both ways (upside and downside)

(I have questions in my own mind whether one can achieve similar effects in non-US markets. Logically of course you can - global markets are integrated. But PE is just not as active in other countries, and the market for buying and selling corporate assets is less liquid. In addition lower economic growth (in other developed countries) cuts in. But you could buy a small cap European stocks fund - and the UK in particular has a very PE-favourable environment, several major UK companies have been taken over by LBOs recently. Just not sure the same logic applies to Japan, say (don't have a view, just don't know) or Taiwan (another country with a reputation for technological entrepreneurship).

Tech small cap I am fairly sure you will be better rewarded in the USA than anywhere else. Even Israel, some sense that the companies IPO when it's time to sell stocks to less well informed foreigners (that may not actually reflect reality).

Buffett and Berkshire Hathaway are a very special case. Kind of like PE without the PE management charge. Used to be Leucadia as well, and in Canada there is Fairfax Holdings. Don't know of any other companies run on those principles (holding companies with a tight focus on shareholder returns in the long run).
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Valuethinker »

simplesimon wrote: Thu Feb 06, 2020 9:53 am
watchnerd wrote: Thu Feb 06, 2020 9:25 am
simplesimon wrote: Thu Feb 06, 2020 5:56 am
I see what you’re saying but what about other toll bridges in the investment universe? I feel like very few people here are thinking of investing in toll bridges. Even now that you explain it does anybody want to do that?
I do it.
Yes but I gathered you're not the average investor. If PE was made available to everyone, many will get smoked.

What kind of reporting do you get and how often do you get it? What's your ROI? Holding period? How leveraged is the investment? How liquid are your shares? (Mainly rhetorical questions most people don't think about)
The Kaufman Foundation report on their VC investing, their *actual* returns (rather than the reported returns by the funds) is sobering reading. Bottom line: returns were lower than they thought and took much longer to actually achieve (many of the funds were not closed on the 10 year time line, but extended in life for several years).

There's a sense of poker in this "If you cannot figure out who is the mug, then you are the mug".

If someone wants to stick 5-10% of their net worth in such investments it's not a horrible idea. But I did that (at a time when tech company share prices made me much richer than I am now) and the opportunity cost of the last 20 years of that lost money has been huge.

We are (surely) at the peak of a credit cycle. The next part is down, not straight across or up? That's not bullish for markets in private assets of any kind.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by watchnerd »

simplesimon wrote: Thu Feb 06, 2020 9:53 am
Yes but I gathered you're not the average investor. If PE was made available to everyone, many will get smoked.

What kind of reporting do you get and how often do you get it? What's your ROI? Holding period? How leveraged is the investment? How liquid are your shares? (Mainly rhetorical questions most people don't think about)
For the angel VC, reporting happens via the quarterly board meetings (I have an advisory position). No leverage.

For the infrastructure, there is leverage, the taxes are a PITA (although not as bad as MLPs), and the shares are incredibly illiquid and done via private party contracts, using personal attorneys, etc.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by james22 »

watchnerd wrote: Thu Feb 06, 2020 9:23 am
james22 wrote: Thu Feb 06, 2020 5:15 am

Owning Vanguard's publicly traded fund will give you partial ownership of the fund's private companies.
Who said Vanguard's fund would be publicly traded?
What?

Do you imagine Vanguard will create the fund and not make it available to trade?
integrity wrote: Wed Feb 05, 2020 9:03 amAt first, the private-equity fund will only be offered to endowments, foundations and other institutions that have appointed Vanguard as a financial adviser. Vanguard expects to open private equity in the future to wealthy individuals who use its financial-advisory services, the people familiar said.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by simplesimon »

james22 wrote: Thu Feb 06, 2020 11:06 am
watchnerd wrote: Thu Feb 06, 2020 9:23 am
james22 wrote: Thu Feb 06, 2020 5:15 am

Owning Vanguard's publicly traded fund will give you partial ownership of the fund's private companies.
Who said Vanguard's fund would be publicly traded?
What?

Do you imagine Vanguard will create the fund and not make it available to trade?
integrity wrote: Wed Feb 05, 2020 9:03 amAt first, the private-equity fund will only be offered to endowments, foundations and other institutions that have appointed Vanguard as a financial adviser. Vanguard expects to open private equity in the future to wealthy individuals who use its financial-advisory services, the people familiar said.
How do you think the fund will work?
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by Broken Man 1999 »

simplesimon wrote: Thu Feb 06, 2020 11:20 am
james22 wrote: Thu Feb 06, 2020 11:06 am
watchnerd wrote: Thu Feb 06, 2020 9:23 am
james22 wrote: Thu Feb 06, 2020 5:15 am

Owning Vanguard's publicly traded fund will give you partial ownership of the fund's private companies.
Who said Vanguard's fund would be publicly traded?
What?

Do you imagine Vanguard will create the fund and not make it available to trade?
integrity wrote: Wed Feb 05, 2020 9:03 amAt first, the private-equity fund will only be offered to endowments, foundations and other institutions that have appointed Vanguard as a financial adviser. Vanguard expects to open private equity in the future to wealthy individuals who use its financial-advisory services, the people familiar said.
How do you think the fund will work?
Perhaps had this opportunity been available when Mr Bogle was setting up his endowment for his school he might have chosen this route. We will never know, though. Just like we will never know where Vanguard would have been had Mr Bogle not declined the ETF opportunity offered to him first.

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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by financeperchance »

Scooter57 wrote: Wed Feb 05, 2020 9:29 am That sound you hear is John Bogle spinning in his grave. <sigh>
Yes, exactly this. I just got done re-reading Common Sense on Mutual Funds, and the idea that Bogle would have in any way been happy about this private equity fund is gaslighting, pure and simple. Maybe Vanguard's present management sees the business need to be in this market segment (and maybe they're right? who knows)--but that's separate from the idea of whether it was consistent with Bogle's philosophies.
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Re: Vanguard Broadens Reach With Entry Into Private Equity

Post by abuss368 »

I can not even begin to imagine what Mr. Bogle would say about this announcement.
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