Wealth Management

Access private equity through Vanguard

Introducing HarbourVest

Vanguard's partnership with HarbourVest, a world-class global private equity firm, offers you a unique opportunity to access a distinct and growing segment of global equities.

Paid non-client endorsement.

Vanguard is proud to partner with HarbourVest, a private markets investment specialist with a long history of innovation and success.

HarbourVest offers global expertise and demonstrated performance across all investment strategies. Like Vanguard, HarbourVest values long-term relationships, uses quantitative analysis, and relies on deep market expertise, which have helped it deliver consistently strong investment results.

Discover a different type of investing

Private equity is an alternative investment that includes any type of equity that isn't listed on a public stock exchange. In general, investors who meet specific requirements can access private equity through direct investment or by working with a private equity firm, which invests in private equity funds.

A private equity fund invests in companies that aren't listed on a public stock exchange. Its performance depends greatly on the quality of the firm and the fund team's skills.

Private equity is characteristically illiquid and has distinct market dynamics that may enable you to earn excess returns over the long term while increasing the diversification of your equity allocation. However, private equity is a complex investment. Please see the FAQs below for information about what you should consider before investing in private equity.

Potential in persistence with private equity (PDF)

Private Equity Primer: learn more about asset class (PDF)

Private Equity at Vanguard: what differentiates our offer (PDF)

The diversification benefits of private equity (PDF)

Benefits of private equity amid higher intrest rates (PDF)

To learn more about investing in private equity, contact your relationship team.

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To learn more about investing in private equity, contact your relationship team.

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How private equity aligns with Vanguard's vision

Developing an understanding

View transcript

What is private equity?


0:00
Hello, I'm Greg Davis, Vanguard's Chief Investment Officer. You may know us as a pioneer in index fund management, but Vanguard is also one of the world's largest providers of actively managed funds. We offered active funds even before we introduced the first index mutual fund in 1976 as part of our mission to give investors the best chance for investment success. We continuously strive to improve client outcomes. In 2020, we partnered with Harbor Vest.


0:29
A specialist in private market investing to give qualified investors access to private equity. We believe private equity offers higher potential returns than public markets and can enhance overall portfolio diversification for suitable investors. We hope the following introductory video helps you determine whether you should further explore private equity. Thank you. Simply stated.


0:58
Private equity refers to investments in companies who shares do not trade publicly. In the United States and Europe, almost all companies are privately held, while publicly traded firms raise capital from investors via the New York Stock Exchange and other markets. Privately owned companies turn to private equity investors for capital, in addition to accounting for the vast majority of firms.


1:24
Private equity represents a unique and growing segment of the global equity market. Over the past decade, the amount of assets invested through private equity funds has more than quintupled. At the end of 2021, private equity accounted for 10% of the total investable global equity market.


1:46
Private equity offers suitable investors the opportunity to earn higher returns than public markets may deliver over the long term, while also providing increased portfolio diversification and expanded equity market coverage. Like any investment, private equity carries risks.


2:05
Some risks, including liquidity and valuation risks, are unique to private equity because investments are privately held and not traded on exchanges. Other risks, including market and selection risks, are shared with public equity investments. As a result, private equity may be suitable for investors with a high tolerance for the risk of active management, long investment time horizons, and high levels of personal liquidity.


2:39
Vanguard research suggests that exposure to a top performing private equity manager can meaningfully improve the likelihood of reaching one's investment goals relative to an equity portfolio invested entirely in the public markets. Our research has also found that successfully investing in private markets requires broad diversification and consistent access to above average private equity managers.


3:03
Diversification has proven to be a powerful investment principle in both public and private markets, helping to reduce portfolio volatility and improve longterm returns. When considering the role of private equity in a strategic asset allocation, Vanguard views the fundamentals of private equity investments to be similar to public equities, and thus a private equity allocation should represent only a portion of an investor's equity exposure, for example.


3:33
An investor with a 70% stock, 30% bond portfolio may target a portion of their 70% equity allocation to be held in private equity investments. Vanguard views private equity as a strategic asset class that represents a distinct and growing segment of global equity markets. It may be appropriate for eligible investors to consider allocating a portion of their overall equity exposure to private equity to achieve greater diversification.


4:03
And the potential for increased longterm returns. Due to the unique nature of private equity, regulations require thoroughly verifying the eligibility of interested investors before discussing any fund or investment specifics. US private equity funds are traditionally structured as limited partnerships.


4:27
Which are exempt from Securities and Exchange Commission registration provided the fund meet certain regulatory requirements pertaining to its investor base. Investors, known as limited partners, must meet the regulatory definitions of qualified purchaser and accredited investor, which require the distributing firm, in this case Vanguard, to thoroughly verify the requirements with interested investors before discussing any fund or investment specifics at Vanguard.


4:57
Private equity is currently available to individual investors with $5 million or more in investable assets and to institutional investors with assets of at least 25 million. Other conditions apply if you believe you are eligible and that private equity is a suitable investment given your unique circumstances. Please speak with your Vanguard representative to learn more.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

Private Equity: Understanding the language

Ariel Finegold: Now I know, Rich, there are a number of terms for investors who are new to the private equity space. They won't have familiarity and fluency yet. Can we touch on a couple of these? Like a capital commitment to a fund, a vintage investment, a vintage year, capital calls and distributions. Let's spend a minute talking through some of these to really get to the nuts and bolts of them.

Rich Powers: Sure, I'll get started with the capital commitment as an example. This is where when you're considering a private equity investment you're going to work with your advisor or you're going to do this independently. You're going to decide what amount of money that you want to allocate to private equity, and hopefully you're thinking about that in the context of this investment is a portion of your overall equity allocation. This is the dollars and cents you're going to invest half a million dollars, a million dollars that you will, when called upon, provide that capital to the private equity investor to put to work in investing companies.

The second one I would just want to touch on would be vintage. Right, so vintage represents, every year there will be a new vintage for which an investor will access the private equity market, and so there's a 2021 vintage, a 2022 vintage, a 2023 vintage. And so for an investor to achieve their target asset allocation, they're likely to have to invest over multiple vintages in order to maintain and reach that target asset allocation.

Now one that I didn't cover, that maybe you can illuminate the audience on, is what is a capital call?

Ariel Finegold: Absolutely. I think it fits in nicely to your initial description of a commitment. So you commit to the fund a certain amount, and then in the early years, over a prespecified period that's in the contract of when the manager has to put that money to work, they're going to start to invest the capital. And so what you'll experience as the end investor is capital calls.

And these are really money that's drawn from you where instead of putting a lump sum investment in a mutual fund and you're in it, this is the way that you ultimately get invested and exposure to the asset class. So certain dollar amounts are going to be requested from all of the investors in their pro rata allocation, and they'll get a notice and a certain amount of time they'll get to end up wiring that money so that it can be put to work when there's an opportunity or a time to invest it.

And then later in the fund life, as the fund does well, capital is returned to you through a distribution. Again in that pro rata process for all of the investors in the fund, according to how much they committed, they will get that percentage distributed when the fund deems there's an event that deserves that capital gets returned; and that's the kind of money you get back, the return you can eat that then goes into, you know, you can sum that up to see what your multiple is, how well you've done in the fund, based on how much you get back relative to how much was invested up front. And so it's that kind of dynamic experience that's unique to private equity, takes some getting used to, but really good managers with client experience at heart will make those capital calls and distributions a simple and seamless experience by smoothing them over time, by netting them where possible, and making ultimately a really easy experience for clients who are experiencing this cap call and distribution thing for the first time.

Rich Powers: Well, you know, that was really helpful.

Ariel Finegold: Thanks for highlighting some of these key terms, Rich, and we really appreciate you tuning in and continuing to learn with us about private equity at Vanguard. And we hope you found this informative and helpful.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

Private Equity at Vanguard: a turnkey experience

Rich Powers: Ariel, as you know, private equity's a complicated thing. There's lots of paperwork and operational complexities to it. We've taken great pains to remove some of those issues from the consideration set so that our clients can access this offer.

One of them, as an example, is offering multiple vintages over years to allow clients to allocate to private equity. What are a couple more?

Ariel Finegold: Thanks, Rich. I think that's a great example of those flexible, annual vintage years to give clients optimal flexibility of how they allocate to the asset class. We absolutely had that one in mind.

I would say, secondly, we have an electronic and digital completely subscription process. Pretty atypical in the industry. The enrollment and subscription signup process for private equity is pretty notorious for being comprehensive and deep, and Vanguard is being conservative and thoughtful while also making it a lot more smooth.

I would say there's also an option that we've built into our structure to have a more simplified tax reporting process. We often hear this is a pain point from clients that the tax experience is tricky, and this has been something to ease that; and many clients have met that with excitement and, hey, this is going to be a lot easier for me come tax time.

We've talked a lot about diversification and the benefits of private equity that sits in a diversified solution that gives you diversification outside of your public portfolio.

Well, this is pretty turnkey. We have in one given immediate exposure to all of these geographies and stages and strategies that sit within this one allocation for a client, and so that's a pretty turnkey, easy solution. Imagine all of the additional operational and challenging and painful work. And if you can even access the private equity landscape successfully, it would be really hard to do. And we've kind of bundled it and made it as simple as possible for our clients.

Rich Powers: So we're not asking clients to trade off experience for investment outcomes. You can actually hopefully have both.

Ariel Finegold: That's exactly right. We have taken great steps in that direction. I hope clients really feel it when they go through the process and enter in the fund and this journey with us.

So thank you so much, Rich, for that question. We hope everyone has enjoyed the learnings today and have found this informative and helpful as you consider investing in private equity at Vanguard.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

Private Equity at Vanguard: Diversification and access

Ariel Finegold: I'll turn this one to Fran in understanding the portfolio construction more broadly and how we should think about the portfolio construction for this offer and how it relates to how Vanguard thinks about portfolio construction overall. That would be a great clarification at this point.

Fran Kinniry: Yes, and what Scott said earlier about private equity having over 100,000 operating companies, and the public market only having let's say 3,500, I think we have to start by putting that into context because Scott just gave a very, very small sample of five or six general partners and maybe six or seven operating companies. On an annual basis, the Vanguard/HarbourVest Fund will have 30 to 35 GPs inside, general partners, that then will hold 10 to 20 operating companies. So a Vanguard investor who elects to come into this will have 6 to 800 companies, and we do recommend annual vintages. So if you do 2021, 2022, 2023, and again you will be getting cash flow coming back.

So it is a very, very diverse landscape. Maybe to run through it a little, the offer will have geographical diversification, very much in line with Vanguard. Sixty to 70% will be in the US; 30% to 40% outside of the U.S. Scott's talked a little bit about venture capital growth equity and primary buyout. This fund will have all of that, probably close to 60% primary buyout, the rest in venture capital and growth equity.

And then stage or strategy, so direct investing. We talked a little bit about secondaries which are pools of capital that you know what is inside and then direct coinvest.

The reason why I go through all this is this is very much in line with Vanguard's total stock market or total bond market where we want to own growth, value, large, mid, small, Europe, Asia. The question is how do you do that on your own? Like if you're a high-net-worth investor with $50 million, let's just say, or $5 million, and you're 70/30 stock/bond, let's just say $50 million, 70% of that's $35 million. And now if you want to do 20% to private equity, that's $7 million private equity, most general partners will want a ticket size; and Scott could probably tell you what that is. You know, it probably varies between $25 and $50 million, and you know this, Ariel, from your experience with private equity.

So we think the starting point to go direct is probably on the order of $10 billion, because if you just do the math, $10 billion, 70% is $7 billion and then 20% would be $1.4. That would be around a $50 million ticket to the general partners. And so it would be very difficult to replicate this on one's own, and so think of this as owning the private equity space in its geography, sector, stage with a world-class manager who is doing bottom-up operating companies to put the alpha on top of that.

Ariel Finegold: I think that is so well said and so true for trying to replicate this on your own. I mean Scott talked about moats in the beginning, but it's partnering with a private equity partner that is so deep and so networked in the industry where it's so critical to getting allocations, I think it's incredibly relevant to share that overall portfolio construction view when thinking about this kind of offer that we're bringing to the marketplace.

Disclaimer:

 

Vanguard has introduced you to HarbourVest in connection with a prospective investment in one or more Vanguard HarbourVest Fund(s) (“VGHV Funds”). In connection with this introduction, please note the following:

  • Vanguard is not a current client of, or investor in, any private fund managed by HarbourVest.
  • The VGHV Funds are the only private equity funds that are made available by Vanguard to its clients.
  • Vanguard will be compensated by its clients in connection with their investments in the VGHV Funds as described below:
    • Vanguard’s Retail Investor Group clients, which include self-directed and Vanguard Personal Advisor Services (“PAS”) clients, will pay Vanguard an annual Vanguard Servicing Fee (“Servicing Fee”), applicable to each VGHV vintage to which they are subscribed, of 0.30% on capital commitments equal to or greater than $500,000 but less than $2 million, 0.20% on capital commitments equal to or greater than $2 million but less than $10 million, or 0.10% on capital commitments equal to or greater than $10 million
    • In addition to the Servicing Fee noted above, advised clients of PAS will also be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in PAS.
    • Advised clients of Vanguard Institutional Advisory Services (“VIAS”) will be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in VIAS.

 

Consequently, Vanguard has a financial incentive to make available to self-directed clients and recommend to advised clients the VGHV Funds.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Past performance is not a guarantee of future returns.

Vanguard is investor-owned. Investor-owned means that fund shareholders own the funds, which in turn own Vanguard.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

This webcast is for educational purposes only and does not take into consideration your specific circumstances or other factors that may be important in making investment decisions. We recommend that you consult a tax or financial advisor about your individual situation.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

Partnership

View transcript

Navigating a complex product: the value of partnering with an Advisor

Ariel Finegold: Hello and welcome to another discussion about private equity at Vanguard. Now today private equity is available for our qualified investors but partnering with an advisor for this asset class, in particular, has distinct and significant advantages.

Now we'll start with you, Andy. In your day-to-day work with clients and the many conversations you have, can you tell us a little bit about the commonalities you're hearing when you talk to those qualified investors and their questions and interests about private equity?

Andy Ordemann: Yes. Great question, Ariel. And just to kind of level set for those in the audience, I have the privilege and opportunity to speak with our self-directed clients in our ultra-high-net-worth space that have $5 million in products here at Vanguard. Some of the common themes are, first and foremost, can they manage it themselves for those that have never really invested within a private equity investment in the past? Two, is how much to commit. They know the minimum is half a million dollars, but is that appropriate for them and their broader portfolio and their needs? Three would be the frequency. How frequent should they invest? Is this a one-time investment or is this a multiple vintage investment? And then last, when we talk about the capital call structure, oftentimes clients that have not invested within private equity expect that their commitment, whether it's half a million or a million, is called away day one. And that's actually not the case. There's going to be a series of capital calls over the early life of the fund. So then the question becomes how do you manage that? Do I keep a certain amount of money in cash? Do I just sell securities when the time arises?

I think those types of questions are all valid, all relevant but one oftentimes an advisor can really solve for through a customized plan that Graham's going to talk about here in a little bit. But those really are the themes that come up almost daily in my conversations with our self-directed clients.

Ariel Finegold: Thanks, Andy. That really resonates as the types of things that both a client who is new to private equity but also the really longstanding clients will continue to have questions and want to make sure they fully get their arms around.

So, Graham, I'll come to you now. Vanguard is set apart from other firms by our true top-down, consistent methodology that clients who have an advisor have access to in a long-term way. Can you tell us a little bit about the details of that methodology and get specific on how clients should think about what they'll get from an advisor here at Vanguard?

Graham Fuller: Sure. So for an advised client, the methodology is really the central point that drives all of the decisions. And we've previously referenced the idea of working with an advisor to help you as a client think through things like suitability and your comfort level with illiquidity in the portfolio and things of that nature. And all of those get filtered and factored into, ultimately, guidance around what might represent an allocation to private equity.

But importantly, and I think very differentiated in the industry, is that Vanguard thinks about private equity as a subset of your global equity allocation.

And so because it's part of one's equity risk budget, we work with a client to come up with a target allocation, and that target allocation serves as the guidepost for how we will work with the client to implement private equity as a program and to get to that target allocation over time. That includes things like developing a customized commitment pacing schedule, it includes working with them to set and determine the target amount they're going to invest and do they need to overcommit to the fund to be able to achieve that target allocation over time, and, of course, it involves working with the client in terms of handling the back and flow of movement of capital raising the cash in a tax-efficient manner to meet the capital calls. When distributions do occur, reallocating that back into the holistic account pursuant to their larger portfolio. So the methodology package is really, really strong and I think what ties it all together for a private equity investor and for the value of Advice.

Ariel Finegold: Thank you so much, both of you, for your insights on the marriage of both product and then Advice creates something pretty unique and differentiated that clients can look forward to for investing in private equity at Vanguard. So thank you both for your time.

We hope you've found this conversation informative and helpful as you consider investing in private equity at Vanguard.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

Active manager search

John Pilkington: I think probably one of the most interesting conversations that was differentiating private equity from other alternative investments, one of the questions we will get occasionally is, "Is Vanguard going into hedge funds?" which is not the case here. And then as we kind of shift from some of the inexperienced investors to those that may be a bit more familiar with private equity in general, I think that reaction is dependent upon their experience in the past, whether it was a positive or a negative experience. And so, ultimately, I think in either scenario, we get to a point to where we are answering the question of why is Vanguard entering this space. And for some, it seems like it departs from the foundational nature of Vanguard's investment philosophy.

And so I'd like to ask you, given that you've been involved fundamentally from the get-go here with Vanguard's private equity, to maybe share a little bit more about the history of the search; also understanding a little bit more how this came to fruition.

Ariel Finegold: Absolutely. We love to answer this question. So Vanguard started over 45 years ago with our founding strategy as active management. And not a lot of people know this, but we started that way with the legendary Wellington fund as an active shop.

So we have a deep understanding over many decades of what drives active management. What are those drivers? What continues to make firms successful? And we have a team dedicated and focused not just at that level but at the highest level from our CEO to our Board of Managers on monitoring and making sure that active managers can continue to persist in their outperformance.

And so I give all that backdrop on our active story because folks don't always talk about that when it comes to Vanguard despite those great attributes and skills that we have in this space, and it's a good backdrop for this story of how we came to launch private equity at Vanguard.

So, you know, specifically for private equity, we had long studied the return enhancing and diversification benefits that private equity offers and our long-time philosophy of providing a market cap-weighted portfolio to our investors encouraged us to look at the growth of private equity relative to public equity. And by not including private equity in a client's portfolio, they were missing out on a growing swath of the equity market. And we saw this growth due to regulation, due to benefits that private companies were getting that made it more appealing to stay private for longer.

And so we understood all of these elements of the marketplace and, also, that due to the fees and the inefficiency and the opacity in this space, there's a very wide dispersion of returns between top private equity managers and underperforming private equity managers. And so if you picked the median private equity manager, it's likely that they're going to underperform in the public markets because of all of those elements in the space that I just touched on.

John Pilkington: Sure. Ariel, I think probably once we get to a fundamental understanding of private equity and we talk through the nature of the investment and the illiquidity, I think probably the best part that our clients start to latch onto as far as the benefits of this in their portfolio and the benefits of partnering with Vanguard to do it, it comes down to something that Vanguard has been a key driver in for many, many years, and that's a level of ease and simplicity. And so the ability to access a diversified product in a single allocation and having the ability to partner with an advisor or relationship manager to make that process for funding capital calls very easy, I think that's probably the biggest piece of that.

But I would be remiss if I didn't say that as we tell the story about private equity and we look at client portfolios and their objectives long term, the performance enhancement is part of what folks latch onto. So I think it's the ease of investing, it's the opportunity for performance enhancement relative to their public equity portfolios, and really between those two, I think that probably drives the majority of the conversations and, ultimately, gets us to a decision of whether it's right or wrong for our client portfolio.

Ariel Finegold: That makes perfect sense, and I think I should also mention before we enter any space or any asset class, we always ask ourselves, we have a very, very high bar and so we always ask ourselves, first, does the investment or the asset class have enduring investment merit? And then, secondly, can we be world-class in our offer? And so everything you just outlined makes perfect sense. How can I see this as a return enhancement? That return enhancement is very much predicated on, as I mentioned, those wide dispersion of returns consistent outperformance and consistent upper half, upper quartile access.

And so what we found is that in our search of the space and when we, ultimately, narrowed down to getting to our partnership with HarbourVest, what was so key is access that investors have a tough time getting on their own. And so what we've brought to the table, and many details about the offering will be available on the private equity resource website for folks to take a look at, is that this is a very diversified offering across strategy, across stage, across geography with a top performing private equity manager that can access funds that are often oversubscribed, meaning that there is too much demand and not enough supply. And they are disciplined and so they may be closed to new investors, and it's challenging to get access on your own.

And even if you have the right amount of assets and you could deploy in a diversified way, which is what is all included in this offer, it would still be really hard to get consistent top access to top managers. And that's what we've been able to bring using our scale and our size and our reputation to our investors so that they can achieve, as you just outlined, that return enhancement over the long term that private equity can bring if you partner with the right firms. And we've done that through our relationship with HarbourVest.

I think we have had some level of reputation at Vanguard at talking about low cost, but it's really what we are very interested in is net outcomes. And if costs come at a great premium where you're continuing to achieve outsized returns, it's very much worth it because they're well eclipsed by what you're achieving well above those costs. And that's what we've modeled and seen as we've looked at the private equity space and HarbourVest, in particular, and their consistent ability to achieve that top half, top quartile manager performance.

And so I wanted to spend another minute on that fees point because it will also feel and look a little bit different where you talked about the incentive alignment. We like when managers are achieving a certain incentive fee or carried interest. And so in this fund, it's going to be a little bit different than an expense ratio what you'll experience. And this is very typical in the private equity space is some kind of management fee that's administrative that helps keep the lights on. And we've been able to create an offering that's going to be very appealing we feel for our clients and when we look the across the industry, will be very appealing.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

Vanguard: Identifying world class investment partners

Ariel Finegold: So earlier we heard from Scott about the partnership with Vanguard. Can you speak a little bit to the process Vanguard used to select HarbourVest and how we ultimately arrived at them as our partner?

Fran Kinniry: Is this an asset class or strategy we want to participate in?

If the answer to that is yes, we then do a deep dive on the manager, and we have a group at Vanguard called Portfolio Review Group. Forty years of selecting managers; I mentioned earlier, Vanguard started active with Wellington is pretty well known. We have more than 50 active managers now, so we are really trained and have a lot of experience in understanding manager selection. And a lot of people would think that you go look at performance and you just go with performance.

But a lot of it is around people alignment, the culture alignment. Those are the more difficult things because anyone can look at a 3-year, 5-year, 10-year, 20-year track record, but it's really about the people.

And what we talk about people is their alignment to clients first. And that is really our ingredient because, at the end of the day, we are a client first firm. We are owned by our asset owners which is very unique. You can be publicly owned or privately owned. We're talking about public and private equity, but we are actually owned by our asset owners. So everything we do is about will this manager produce high performance, risk adjusted performance for our asset owners.

A lot of things we look at are people, philosophy, process, and the peoples, are the economics really shared to get client outcomes? So that's where we spend most of our time focusing on.

Ariel Finegold: Thanks, Fran. That's a great summary of the people philosophy process but then, ultimately, leads to performance and outperformance, which is the critical ingredient to what we believe sets top managers apart.

 

Disclaimer:

Vanguard has introduced you to HarbourVest in connection with a prospective investment in one or more Vanguard HarbourVest Fund(s) (“VGHV Funds”). In connection with this introduction, please note the following:

  • Vanguard is not a current client of, or investor in, any private fund managed by HarbourVest. 
  • The VGHV Funds are the only private equity funds that are made available by Vanguard to its clients.
  • Vanguard will be compensated by its clients in connection with their investments in the VGHV Funds as described below:
    • Vanguard’s Retail Investor Group clients, which include self-directed and Vanguard Personal Advisor Services (“PAS”) clients, will pay Vanguard an annual Vanguard Servicing Fee (“Servicing Fee”), applicable to each VGHV vintage to which they are subscribed, of 0.30% on capital commitments equal to or greater than $500,000 but less than $2 million, 0.20% on capital commitments equal to or greater than $2 million but less than $10 million, or 0.10% on capital commitments equal to or greater than $10 million
    • In addition to the Servicing Fee noted above, advised clients of PAS will also be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in PAS.
    • Advised clients of Vanguard Institutional Advisory Services (“VIAS”) will be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in VIAS.

 

Consequently, Vanguard has a financial incentive to make available to self-directed clients and recommend to advised clients the VGHV Funds.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Past performance is not a guarantee of future returns.

Vanguard is investor-owned. Investor-owned means that fund shareholders own the funds, which in turn own Vanguard.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

This webcast is for educational purposes only and does not take into consideration your specific circumstances or other factors that may be important in making investment decisions. We recommend that you consult a tax or financial advisor about your individual situation.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

Discipline

View transcript

Right time to enter

Ariel Finegold: That makes perfect sense, and I think that it's an often-overlooked element as part of a client's holistic portfolio. I think I want to just touch on the diversification point as well because private equity is reducing your correlation with your equity risk as well. And so this is an asset class, and I started to touch on this, of the elements of diversification that we have. And if the drivers of return and one of the key objectives is to reduce that correlation, it comes through the great diversification in portfolio companies. This product has thousands of underlying portfolio companies. Thirty to 40 private equity partnerships in the primary sleeve alone and is geographically diversified. It's all of those elements can help a client reduce that correlation specifically with the equity market, so I want to touch on that for a minute.

What else are you seeing clients react to as I talk about that equity market element in the role that private equity can play and even as we experience and think about volatility in the marketplace that clients are very sensitive toward?

John Pilkington: Yes. Well I think, you know, this is probably a good current event question given the market reaction to the recent Fed increase and just, I think, in general what we experienced here year to date in 2022. We're seeing added volatility in public equity markets. And that's not necessarily foreign to private equity, right, but it is something that when we talk about correlation, we talk about assets that are not perfectly correlated with one another. That helps to improve investor outcomes long term and helps to create a little bit more stable bottom line, so I think it's absolutely a hot topic today. In fact, I had a question earlier today of, "If equity markets are as volatile as they are at the moment, should I be considering an opportunity to increase my private equity exposure versus looking and going in the other direction?"

Ariel Finegold: That's a great application. And I want to just stay on that topic for a minute because we did receive a question that came in that was presubmitted that was asking about, "How do you think about the right time to enter the private equity space?" And I'd like to talk a little bit about this myself, but the question was really around like, "Hey, should I be thinking about investing now? Should I be thinking about committing later?" You provided one reason why, you know, there are fortuitous things in the marketplace, especially related to trust and legislation. But I do think it's an interesting point because at Vanguard we don't typically, or really ever, think of ourselves as market timers; we are very focused on the long term. And for those who try to time the market or think that they're at the top, it's often a fool's errand.

So would love to hear your reaction on this and then I'm happy to share a little bit more of our team's thinking about our timing of the launch and its role in the very long term for our clients.

John Pilkington: Absolutely. So I'm very fond of the statement that if you're a long-term investor, then anytime is the right time to invest in equity, whether that be public or private. So if we think about current events, obviously, that creates jitters. It's a question of timing due. Is this the right time to be buying stocks? Is this the right time to be buying bonds even? And so that, obviously, translates well to private equity.

At the same, you know, we're coming out of a period, or maybe we're coming out of a period, where you could say that equity market valuations are pretty stretched. And I think that's been inviting the question for quite some time of "If there's a lot of money flowing into this product, if there's a lot of money flowing into the equity space in general, is this the best time to be investing? Should I be waiting for that better opportunity?"

And I think that the structure of the private equity actually maybe brings a little bit of comfort to or comforting response to that question. So, yes, I lean on the it's a good time as any if you're a long-time investor to buy private equity or public equity. But the way that these private equity funds are managed and the way that we intend to treat it as a program is really thinking about the cash that's going into this investment is going to take some time to ramp up. And I think if we think of it programmatically, then we're going to be continually adding and looking for vintage year diversification in the private equity investments that we make for clients.

And I think that's a key consideration when we think about the right time to invest in private equity. It starts to, I guess, smooth out that time and reduce, at least from my vantage point, reduce the consideration of whether this is the best time or the right time. It's we are going to manage this in a smooth process.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

How/Where to fund your PE sleeve

Ariel Finegold: Absolutely. I mean I think the question is also coming from a place of understanding the risk exposure in your portfolio. And the way we've thought about the private equity in Vanguard portfolios – we can jump into methodology more – is that we see this as being funded from your public equity allocation. So we're not recommending you dramatically change or shift your risk exposures from fixed income or otherwise; we're saying this is funded from your public equity allocation. This is a part of the market you have not been previously able to access but still has equity as part of it.

However, there are different drivers of returns in the private space. So what you're getting the main return drivers are going to be, of course, you have the equity risk premium but you also have an illiquidity premium. And this is part of your private equity investment that's inherent in lots of different spaces outside of the private equity space for on-the-run/off-the-run Treasuries, junk bonds, versus high-quality bonds. We see this throughout markets. So you're getting the illiquidity premium.

Ariel Finegold: And I also just wanted to take a moment to talk a little bit about some of the elements you just shared for those who have limited experience in this space. So you first talked about the commitment and pacing over time. Just to get to the nuts and bolts, when we talk about commitments, clients are committing the amount of capital they want upfront so they know they want to put, you know, we're driving to a target allocation that's a percentage but let's say they want to put 5 million upfront or 2 million upfront or a smaller number for example's sake.

What happens is over the life of the private equity investment, that dollar amount is eventually gradually called as investments are deployed at the underlying level. So what happens is HarbourVest is going to determine that, hey, they found an investment that will necessitate some percentage of that 2 million upfront, and then they'll put that into the ground and make investments over the investment period in the early part of the fund life.

And then what happens over time is that those dollars are called and their distributions come back, and then, ultimately, that ends up being some percentage, some small portion of the commitment that's, ultimately, having to be wired from your account because their netting all along the way distributions from realizations along with calls. So I wanted to take a moment to make sure those kind of nuts and bolts were covered.

I think it could be helpful understanding some of these different elements about calls and distributions and how a client is thinking about committing upfront to understand how this is like with an advisor. So we know that there are many folks tuning in tonight who don't have an advisor with Vanguard and are also getting exposure to or interested in investing in private equity, but we want to spend a moment spotlighting that experience and your role.

John Pilkington: Yes. Thanks, Ariel. So let me say, first off, this is relatively new at Vanguard. Obviously, this is new in our Personal Advisor Services and it's something that we have thought a tremendous amount about as to how it's rolled out, how we deliver this to clients. And I think there are several things that we are looking for in that initial conversation in thinking about how do you size the allocation. So that's probably the first key decision that we help investors make is what makes sense for the goals and the objectives of a portfolio? How do you think about that from- Because you acknowledge that these funds are relatively illiquid, so you want to be mindful of that in making that decision.

And then beyond the sizing, I think there's, we talked about the pacing a moment ago. And one of the things I think that we've been very thoughtful is trying to help investors illustrate that for investors and putting together a commitment pacing schedule showing them in a very programmatic way how that capital will look. Obviously, it's expectations but how that will look over time between capital contributions, between distributions, how those offset and how that ramps up and looks and grows to meet their overall objective in terms of their allocation and their sizing.

I think the other part that we look at is the ability to, as I mentioned earlier, manage that size in a dynamic way if we want to tailor that allocation, if we want to gradually work into a higher allocation or we want to taper that at some point in time in the future.

And then I think, you know, another piece that will be a very key component of this is determining how do you fund these capital calls making sure that there's cash available to do it, doing it in a tax-aware manner, and just like with the rest of your portfolio, making sure that it's rebalanced effectively; that we're maintaining those allocations and we're doing it in line holistically with the rest of your portfolio.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

Investing with Purpose

View transcript

Programmatic Approach

Ariel: So I want to touch on this a little bit more. You touched on methodology and how we think about investing in a programmatic way. And so I want to spend a minute on the product design. When we came to market and we were thinking very thoughtfully about what clients would benefit from the most, we designed this in partnership with HarbourVest in a very flexible way. And so the way the product is offered today is in annual vintage years. And so each year we are offering a new offer, a private equity offer, and this allows clients to gain access when works for them but also enables a really programmatic approach that you just started talking about where clients can continue to invest in this space and achieve time diversification and a couple other elements of diversification.

Ariel: So let's talk a little bit more about this programmatic approach that we recommend for our investors to not just invest once and your private equity exposure sits like it would in a public market investment. It's a little bit different here. Let's talk about that.

John Pilkington: Sure. So, Ariel, in Personal Advisor Services, our methodology, very much like public markets, we think very strategically about how we size an allocation. And this is not terribly different from your decision of how much do you put in large companies and how much do you put in mid and small companies. We think about this very strategically in the sense that, I think, our first decision is what does that size allocation look like and then we want to help investors figure out how do you maintain that target allocation over time, similar to how we rebalance a portfolio ongoing through different market dynamics.

John Pilkington: I think the other thing that's interesting about this given the fact that we expect, we work with clients and the goal is to make an initial commitment and then we make smaller follow-on commitments to be able to maintain that allocation over time, but it also gives us a little bit of flexibility. So let's think about, like, an asset allocation, for example. You may decide over time that you want to dial back your equity exposure. This product design gives that opportunity very well because we can be very dynamic in how we allocate the follow-on commitment. So let's say maybe we start out at allocating 20% of your equity exposure to private investment. Well if say in year five, we want to start to work that down to 10% of your equity investment, we can do that through adjusting the follow-on commitments.

Ariel Finegold: That makes perfect sense. And I think we're very intentional about making this personalized and specific to each investor and how they see where this can improve their outcomes over the long term.

 

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

PE and Legacy Planning

Ariel Finegold: So I want to start with you, John, and talk about that first element of diversification in a client's portfolio. Our viewers view that as a key reason for inclusion. I want to hear your reaction to that.

Now, finally, if you need to access technical help at any point, it's available by selecting the widget below. And for additional insights on private equity at Vanguard, feel free to click on the Resource List.

All right. Now let's get started. Now, John, we asked our clients a few questions when they registered, and I think it's important to level set with our viewers about where everyone's experience level lies. Now I was delighted to see that the majority of those who registered this evening have limited experience with the asset class, the private equity asset class. And we know that Vanguard has entered the space a few years back, and the experience and depth that we've tapped into through our partnership has meant that we are reflecting decades of knowledge and experience in this space, but it's still new to Vanguard investors. So I'd like to hear from you about how those client conversations have gone for folks who have limited experience in this space.

John Pilkington: I think that makes total sense, Ariel. I mean if I think about Vanguard's investment philosophy and how we look at both equity and fixed income products, our goal is to spread our net as wide as possible, right. So we talk about the ability to do that in easy format. With private equity, diversification is something, as I mentioned earlier, that is a new opportunity for our investors. It's a new opportunity to take it a little step further than the public equity investment. I think private equity also gives that ability, as we discussed, for the return enhancement to have a little higher expectations out of your portfolio returns.

But I will say, like, one of the poll results that surprised me, at least in how I think about private equity for our Personal Advisor clients that I work with, is really around the legacy planning. So the legacy planning is a piece that I think is a really key consideration to inclusion of private equity in the portfolio. When we think about where do you want your returns to be enhanced, I mean if you can do that outside of your estate, that's a key place to look for added alpha in the portfolio to increase portfolio returns because whatever is growing there is growing outside of estate taxation in the future.

And I think that's a piece that maybe is not as focal in the discussion that we have at the surface level of private equity, but as we dig deeper a little bit, that's something that ultimately comes to light is that this is a good place to have it. So we think strategically about where in your wealth planning does it make the most sense for you to locate private equity.

So I wanted to address that, but I wanted to touch back and circle back on something you mentioned earlier about the legacy planning piece. And so we saw that that turned out to be a smaller element that clients saw as a role in their portfolio, but I want to talk, John, more about your experience with that and clients. You touched on that at the beginning, but I know you've had a number of these conversations we've talked about where it's become particularly helpful and elemental in the discussions you've have with clients.

John Pilkington: Sure. So I think one thing that's really fortuitous in the way of timing of Vanguard's launch of private equity comes on the heels of a lot of upheaval is probably not the right word but definitely some angst around estate tax exemptions. We went through a phase in 2020 where there was an expectation that Congress would roll back the exemption amount and then, in 2021, there was actually proposed legislation that hit the House. So in both those years I can recount a number of new trusts that were created with our clients where we went ahead and took advantage of the existing exemptions that were in place. So with those new fundings, it was, again, opportune time to visit the allocation on those.

In many cases, if you were going to fund say a legacy asset, a trust that the intent is you're never going to spend from this, this is geared towards your heirs; so if that is truly the intent, what better than an illiquid asset that has higher expectations on returns to fit in that portfolio?

And so to kind of add to that story, as many of these clients were funding these types of trusts, you're funding it from a personal portfolio. You may be funding it from an allocation that makes sense for you where you're trying to meet, let's say, retirement goals and cash flow spending and then you're pushing it into now a new asset or new trust that you're not going to take distributions from in your lifetime. So in many cases, we worked through a scenario where we increased the equity allocation in the portfolio, or at least we increased our targets. And so that was an ideal time for us to say, "Okay, we're going to take money from say the fixed income side of the portfolio and we're going to push that into equity." And so Vanguard's private equity launch couldn't have come at a better time for those clients that took advantage of that opportunity and utilized those new trusts.

Ariel Finegold: That's a great application. And I want to just stay on that topic for a minute because we did receive a question that came in that was presubmitted that was asking about, "How do you think about the right time to enter the private equity space?" And I'd like to talk a little bit about this myself, but the question was really around like, "Hey, should I be thinking about investing now? Should I be thinking about committing later?" You provided one reason why, you know, there are fortuitous things in the marketplace, especially related to trust and legislation. But I do think it's an interesting point because at Vanguard we don't typically, or really ever, think of ourselves as market timers; we are very focused on the long term. And for those who try to time the market or think that they're at the top, it's often a fool's errand.

So would love to hear your reaction on this and then I'm happy to share a little bit more of our team's thinking about our timing of the launch and its role in the very long term for our clients.

Disclosure:

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

View transcript

Private Equity at Vanguard: Alignment to our strategy and vision

Ariel Finegold: So, Fran, lets kick things off with a question I know is top of mind for our clients, which is why private equity now for Vanguard?

Fran Kinniry: Yes. So the why now is really it's been a long time in the making. and we're always trying to be innovative and challenge the marketplace to improve client outcomes.

And we kept coming back, you know, we own really the public market space both on the index side and the active space. And we really kept coming back to private equity being a unique asset class, complementing a public portfolio. And that if we could find a manager that we felt comfortable to get us top quartile returns, the returns and the diversification really would benefit our asset owners.

We kicked off a manager search. At about a year worth of that search concluded that HarbourVest would be our partner, and we launched in February 2020.

Ariel Finegold: I think it's an appropriate time to ask about a presubmitted question that a client shared who has long followed our history and approach. And he asks how our entry into private equity actually aligns with Jack Bogle's vision for Vanguard.

Fran Kinniry: Yes. So a lot of people may think of Vanguard just about indexing or low cost, but if we actually rewind history, Vanguard was started as an actively managed firm. We remain one of the largest actively managed firms. So we're very proud of our indexing and low cast, but we're also very proud of our active capabilities, and private equity falls right in that realm.

And what else? You know, when Vanguard started, what Vanguard really did is take innovative institutional asset classes and strategies that were already available, but they may have only been available to the hundred-million-dollar pensions and endowments.

What Vanguard did is we retailized or we brought down market world-class indexing, active, and we think private equity falls right in this space because the top 1% of asset pools have been using private equity for 30 years with great returns and diversification. And so we're very proud to follow in the footsteps of our past.

 

Disclaimer:

Vanguard has introduced you to HarbourVest in connection with a prospective investment in one or more Vanguard HarbourVest Fund(s) (“VGHV Funds”). In connection with this introduction, please note the following:

  • Vanguard is not a current client of, or investor in, any private fund managed by HarbourVest. 
  • The VGHV Funds are the only private equity funds that are made available by Vanguard to its clients.
  • Vanguard will be compensated by its clients in connection with their investments in the VGHV Funds as described below:
    • Vanguard’s Retail Investor Group clients, which include self-directed and Vanguard Personal Advisor Services (“PAS”) clients, will pay Vanguard an annual Vanguard Servicing Fee (“Servicing Fee”), applicable to each VGHV vintage to which they are subscribed, of 0.30% on capital commitments equal to or greater than $500,000 but less than $2 million, 0.20% on capital commitments equal to or greater than $2 million but less than $10 million, or 0.10% on capital commitments equal to or greater than $10 million
    • In addition to the Servicing Fee noted above, advised clients of PAS will also be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in PAS.
    • Advised clients of Vanguard Institutional Advisory Services (“VIAS”) will be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in VIAS.

 

Consequently, Vanguard has a financial incentive to make available to self-directed clients and recommend to advised clients the VGHV Funds.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company, or their subsidiaries or affiliates. Investments in funds issued by HarbourVest are made available to the following Vanguard clients:

  • Self-directed clients of Vanguard’s Retail Investor Group can access HarbourVest funds through Vanguard Marketing Corporation. The decision to invest in the HarbourVest funds will be the sole responsibility of such self-directed clients, and no Vanguard entity will determine the suitability of investments in any HarbourVest fund or otherwise make investment recommendations to Vanguard’s self-directed clients.
  • Advised clients of Vanguard’s Personal Advisory Services can access HarbourVest funds through Vanguard National Trust Company. Vanguard National Trust Company will assess the suitability of any recommendations to PAS clients to invest in the HarbourVest funds.
  • Advised clients of Vanguard Institutional Advisory Services can access HarbourVest funds through Vanguard Advisers, Inc. Vanguard Advisers, Inc. will assess the suitability of any recommendations to its advised clients to invest in the HarbourVest funds.

Any such offers may be made only to Vanguard clients who met the definition of accredited investors and qualified purchasers under federal law and by means of delivery of a confidential Private Placement Memorandum or similar materials that contain a description of the material terms of such investment. No sale will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Past performance is not a guarantee of future returns.

Vanguard is investor-owned. Investor-owned means that fund shareholders own the funds, which in turn own Vanguard.

With private equity (“PE”) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation, however, limited partners (“LPs”) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity’s sensitivity to public markets is likely greatest during the late stages of the fund’s life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there’s still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security’s liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from the General Partners (“GPs”).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity NAVs are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity doesn’t have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk can’t be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.

This webcast is for educational purposes only and does not take into consideration your specific circumstances or other factors that may be important in making investment decisions. We recommend that you consult a tax or financial advisor about your individual situation.

For qualified purchaser and accredited investor use only.

© 2022 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

Frequently asked questions

Private equity is generally only accessible to ultra-high-net-worth investors, either through direct investment or in partnership with a private equity firm, which invests in a private equity fund. A private equity fund invests in companies that aren't listed on a public stock exchange.

Only accredited investors who meet specific qualifications outlined in federal securities laws qualify to invest in private equity funds. Certain private equity funds require investors to meet the definition of "qualified purchaser" in addition to being an accredited investor. This might include institutional investors, such as insurance companies and pension funds, as well as high-income and high-net-worth individuals. The initial investment amount for a private equity fund is often very high.

A private equity investment may be appropriate for investors with a long time horizon who are seeking additional portfolio diversification. Private equity investors are generally comfortable assuming greater risk in exchange for the potential for higher returns over the long term.

U.S. private equity funds are usually structured as limited partnerships. Investors in the funds are limited partners and have to meet certain requirements. The general partner of a fund usually serves as its investment manager.

Although several factors influence a private equity fund's investment returns, the investment manager's skill in creating value through operational, governance, and financial strategies is one of the most important factors in the success of a fund over the long term.

Historically, private equity returns have surpassed public equity returns.* These excess returns "reward" an investor for taking on the risk of making a large, long-term capital commitment and receiving uncertain cash flows. But private equity returns can vary drastically by fund, which is why it's important to choose a reputable private equity firm with skilled fund managers.

Keep in mind, private equity investments are complex and require patience in investing. Investing in private equity requires you to make a long-term commitment of investment capital, and you can experience negative returns in initial years until the fund's underlying investments mature.

The fees for investing in a private equity fund are generally higher and more complex than public equity fee structures. It's important to review the fund's partnership agreement carefully before investing.

When you invest in a private equity fund, you make a capital commitment. Committed capital is money an investor has agreed to contribute to an investment fund. The fund manager generally makes calls for capital from fund investors during the fund's first 1–3 years. If an investor fails to meet a capital call, it may be considered an event of default, which could negatively impact the private equity fund and its returns. During the next several years, you may begin receiving distributions from the fund, consisting of return of capital plus premium. The timing of calls for capital and fund distributions are unpredictable over the lifespan of the fund, which is generally between 12 and 14 years.

Investing in a private equity fund requires a long-term commitment, with no certainty of return. Many private equity funds require capital to be committed for 10 years or more.

There's no public market for interests in private equity funds. Because they aren't registered under federal or state securities laws, they're not transferable unless an exemption applies. If you invest in a private equity fund, your interests in the fund may not be sold, assigned, participated, pledged, or otherwise transferred without the prior written consent of the general partner of a fund.

  • Leveraged buyout transactions. Private equity funds can make growth equity and venture capital investments, which involve a high degree of business and financial risk. These investments can result in substantial losses.**
  • Investments in credit-related transactions. Private equity funds can invest in credit-related transactions involving junior and senior debt investments, which may be unsecured debt that's not backed by collateral.
  • Investments in unstable companies. Private equity funds can invest in securities of highly leveraged companies, financially troubled companies, or companies involved in work-outs, liquidations, reorganizations, recapitalizations, and bankruptcies. While these investments could offer the potential for high returns, they're also associated with greater risk.
  • Use of leverage. Private equity funds may use leverage in their investment strategies, meaning they borrow funds. If these funds earn more money than it costs the firm to use the funds, the private equity fund's investment returns will increase. If the borrowed funds earn less money than it costs the firm to use the funds, the private equity fund's investment returns will decrease.

The income taxation of partnerships and partners is extremely complex.†

Please consult a tax advisor before purchasing a private equity fund.

*See Kaplan and Sensoy (2015) for a survey of past private equity performance literature. Here's an excerpt from the conclusion: "Evidence from new sources of GP-LP [general partner-limited partner] cash flow data, extending through 2011, indicates that BO (buyout) funds have outperformed the S&P 500 net of fees on average by about 20% over the life of the fund. Despite their different data sources, Robinson and Sensoy (2013), Harris et al. (2014), Higson and Stucke (2014), and Phalippou (2013) all find virtually identical average BO PMEs [public market equivalents] using the S&P 500 as the benchmark, suggesting that each of these datasets is reasonably representative of the universe of BO funds. While the evidence overwhelmingly supports BO outperformance relative to the S&P 500, the correct benchmark can be debated." More recent results from Harris, Jenkinson, and Kaplan (2016) show private equity outperformance is still present relative to various alternative public market indexes, in addition to the S&P 500, which was commonly used in early private equity research. Aliaga-Díaz et al. (2020) shows global private equity outperformance through regression-based analysis of approximately 4%, annualized.

**The most significant risks of leveraged buyout transactions are associated with investments in (i) companies in an early stage of development or with little or no operating history, (ii) companies operating at a loss or with substantial fluctuations in operating results from period to period, and (iii) companies with the need for substantial additional capital to support or to achieve a competitive position.

†Tax implications may involve, among other things, significant issues as to the character, timing of realization, and sourcing of gains and losses. Private equity fund investors may be allocated deductions and credits from the fund that they may not be able to claim on their tax returns. Private equity fund investors may be allocated taxable income by a fund that is in excess of the actual cash distributions received during a tax year. Schedule K-1s may not be provided by a private equity fund prior to the time the private equity fund investor's tax return reporting obligations become due, and investors may need to file for extensions. Offshore fund investing structures may be used by U.S. persons investing in private equity to reduce certain tax-filing complexities associated with partnerships but may introduce other risk factors from investing in foreign-domiciled fund structures.

Vanguard has introduced you to HarbourVest in connection with a prospective investment in one or more Vanguard HarbourVest Fund(s) (“VGHV Funds”). In connection with this introduction, please note the following:

  • Although Vanguard is an investor in certain VGHV Funds, Vanguard is providing you information about the VGHV Funds in its role as a promoter of the funds and not as a client of, or investor in, any private fund managed by HarbourVest.
  • The VGHV Funds are the only private equity funds that are made available by Vanguard to its clients.
  • Vanguard will be compensated by its clients in connection with their investments in the VGHV Funds as described below:
    • Vanguard Personal Investor clients, which include self-directed and Vanguard Personal Advisor Wealth Management, will pay Vanguard an annual Vanguard Servicing Fee ("Servicing Fee"), applicable to each VGHV vintage to which they are subscribed, of 0.30% on capital commitments equal to or greater than $500,000 but less than $2 million, 0.20% on capital commitments equal to or greater than $2 million but less than $10 million, or 0.10% on capital commitments equal to or greater than $10 million.
    • In addition to the Servicing Fee noted above, advised clients of Personal Advisor Wealth Management will also be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in Personal Advisor Wealth Management.
    • Advised clients of Vanguard Institutional Advisory Services ("VIAS") will be assessed advisory fees on their investments in the VGHV Funds that are included as part of their advised portfolio in VIAS.

Consequently, Vanguard has a financial incentive to make available to self-directed clients and recommend to advised clients the VGHV Funds.

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any specific investment product sponsored by, or investment services provided by The Vanguard Group, Inc., Vanguard Advisers Inc., Vanguard Marketing Corporation, Vanguard National Trust Company or their affiliates.

Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This communication is for informational purposes only and does not constitute an offer or solicitation to purchase any investment solutions or a recommendation to buy or sell a security nor is it to be construed as legal, tax or investment advice. Unless otherwise indicated, any information available through this communication is as of the date indicated therein and may not be updated or otherwise revised to reflect information that subsequently becomes available. HarbourVest is under no obligation to update the information contained in this communication.

Additionally, the information in this communication does not constitute a representation that the solutions described therein are suitable or appropriate for any person, and HarbourVest does not accept any liability with respect to the information.

For qualified purchaser and accredited investor use only.