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Private equity at Vanguard

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Why choose Vanguard for private equity?

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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.

For over four decades, we've sought out and identified exceptional investment opportunities and talent. By joining forces with one of the world's most experienced and accomplished private equity managers, we've developed a custom solution that provides turnkey access to diversification across private equity strategies, company stages, and geographies. Since its launch, our private equity offer has grown to more than $1.9 billion in client commitments.1

Paid non-client endorsement.

 

Potential for higher returns

Private equity has distinct market dynamics that enable the potential for excess returns over the long term.

Access to world-class funds and managers

Potentially improve the likelihood of reaching your investment goals by working with a top-performing private equity manager.

Diversify beyond the public markets

Invest in a new asset class that expands your global equity allocation, spreads risk, and captures potential opportunity.

What is a private equity fund?

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 funds typically play an active role in the companies they invest in to create value. Private equity is characteristically illiquid and more complex than investing in public markets, but it has distinct market dynamics that may enable you to earn excess returns over the long term while increasing the diversification of your equity allocation.

Who's eligible to invest in private equity?

Clients must have $5 million in Vanguard assets, in addition to meeting qualified purchaser and accredited investor regulatory standards.2

What is a private equity fund?

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 funds typically play an active role in the companies they invest in to create value. Private equity is characteristically illiquid and more complex than investing in public markets, but it has distinct market dynamics that may enable you to earn excess returns over the long term while increasing the diversification of your equity allocation.

 

Who's eligible to invest in private equity?

Clients must have $5 million in Vanguard assets, in addition to meeting qualified purchaser and accredited investor regulatory standards.2

Private equity insights

Learn more from Vanguard experts about what you should consider before investing in private equity.

 

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Frequently asked questions

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.

Historically, private equity returns have surpassed public equity returns.3 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.


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.

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 early years of a fund. 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 up to 14 or more years.

Vanguard partners with HarbourVest, a world-class global private equity firm with a long history of innovation and success, to offer you a unique opportunity to access a distinct and growing segment of global equities.

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.

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1Source: Vanguard, as of March 31, 2024.

2Clients must meet the qualified purchaser and accredited investor standards under federal law, typically showing that their net worth is over $1 million or their annual income has been more than $200,000 in the last two years.

3Source: Bain & Company Global Private Equity Report 2023, which shows that private market returns have outpaced public market returns over every time horizon. 

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.

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.

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.

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 Marketing Corporation, Vanguard National Trust Company or their affiliates. HarbourVest partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. The communication is for informational purposes only and does not constitute an offer or solicitation to purchase any investments 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.