Vanguard private markets head: PE will come downmarket – updated

Private equity should be an asset class for the 99% of investors who 'need it more', says the index fund behemoth's Fran Kinniry.

Restrictions on who can invest in private equity should be based on investment horizon and not income or wealth, according to Vanguard‘s global private investments head.

Fran Kinniry_Vanguard
Kinniry: PE to the masses

Speaking to Private Equity International prior to the US Department of Labor’s guidance last Wednesday that paves the way for 401(k) plans to invest in private equity, Fran Kinniry said private equity should be an asset class for the 99 percent of investors who “quite frankly may need it more”.

“I don’t see how private equity is not a continuing growing space, because it’s going to come downmarket,” he said. “Most investors probably do not need to be 100 percent liquid. If you’re a long duration investor, say 20 years or more, the question should be asked, why do you need to be 100 percent liquid?”

Such investors could have between 15 percent to 25 percent of their portfolio in illiquid assets if they believe that the risk/return and overall portfolio is improved, he added.

The DoL‘s move means retirement plan administrators can include private equity as part of their defined contribution mix – a move welcomed by much of the PE industry. Partners Group and Pantheon, for example, both have products structured as investment trusts that plan sponsors can use to build private equity exposure into their programmes. These would be incorporated into target-date funds as investment sleeves.

Vanguard formed a partnership with HarbourVest Partners in February to initially provide pensions, foundations and endowments access to private equity. The Vanguard HarbourVest 2020 fund has reached its target number of clients and capital raising for the year, Kinniry said, adding the firm has been “pleasantly happy” with the number of clients who have shown interest in the offering despite the global shutdown and health pandemic. It has yet to deploy any capital.

Vanguard plans to raise annual funds to invest in private equity that will all have the same fund of funds structure. HarbourVest will continue to be the firm’s partner of choice for the foreseeable future, Kinniry said.

The Pennsylvania-headquartered firm, known for pioneering index funds in the 1970s, does not plan for its private equity funds to be index funds of the asset class.

Our goal here is not to create an index private equity market, our goal is to find and work with world-class managers that are going to deliver higher returns over the median or average,” Kinniry said. 

“It took us 35 years to do this on indexing, 20 years to do it on active [funds], so 20 years from now, maybe private equity and its access to world-class managers, for the average investor, looks very much like indexing did in 1975-1995.”

It is unclear how the lifting of restrictions will affect Vanguard’s immediate plans to offer private equity investments to its clients, and a spokeswoman for the firm said it would not be commenting on the DoL’s announcement.*

Retail investors are in Vanguard’s sights after expanding its offering from the outsourced CIO market to high-net-worth qualified investors and retail-advised qualified investors, according to Kinniry.

“The future does look optimistic for end investors to potentially have better investment outcomes through regulatory relief of private equity.”

– Chris Witkowsky contributed to this report.

*A Vanguard spokeswoman has since provided the below statement on the DoL’s announcement:

Vanguard believes the Department of Labor’s recent guidance on including private equity as part of a professionally managed diversified investment solution within 401(k) plans is a positive step forward in broadening investment access and leveling the playing field across investor types. (The Department’s guidance specifically does not address permitting individual participants to invest directly in such investments.)

Ultimately, plan sponsors have a fiduciary responsibility to act with diligence and care for the sole benefit of their participants, whose retirement savings they help steward. The Department of Labor’s guidance thoughtfully outlines the focus areas that plan sponsors would need to address prior to adoption, including assessment of investment, administrative, and operational complexities, as well as acknowledging the regulatory complexities that may arise under federal securities, banking or other applicable laws.