Executive Summary: Private markets are being pitched as the next frontier for everyday investors—with Vanguard now joining the push. But don’t believe the hype. Alternative investment funds are expensive, opaque and illiquid. Their risk-reducing qualities are oversold. And unless you have access to the best managers, private investments are more likely to add complexity to your portfolio than improve performance.
The push into alternative or private assets can be laid at the feet of the late David Swensen, who used private equity and venture capital investments to great effect, juicing performance at Yale’s multi-billion-dollar endowment over several decades. Yet even Swensen, in his book Unconventional Success: A Fundamental Approach to Personal Investment, had a skeptical view of the whole enterprise:
Non-core asset classes provide investors with a broad range of superficially appealing but ultimately performance-damaging investment alternatives.
So, you’re probably asking, do I need private assets—equity, credit or real estate—in my portfolio? That’s a question that more and more investors will have to grapple with as they are faced with myriad new choices foisted upon them by an investment industry focused primarily on grabbing and locking up more and more of their clients’ assets.
Of course, they won’t exactly put it so bluntly. Couching it in the so-called “democratization of private markets,” investment firms are prying open the world of private investments—once reserved for endowments, pensions and the ultra-rich—for a broader pool of investors. Their ultimate vehicle of choice? Your IRA and 401(k), where assets are “sticky” and, when invested in private assets, will become even stickier.
And don’t think Vanguard isn’t in on this game. In an early interview upon becoming Vanguard’s CEO, Salim Ramji told Bloomberg that “low-cost investing applies in index, and it applies in active—and I would like it over time to also apply in private assets.”
True to his word, Ramji has steered Vanguard further toward offering private investments to its shareholders. They recently announced a partnership with Wellington and Blackstone and the upcoming launch of the WVB All Markets interval fund.
Of course, Vanguard is not alone.
- Capital Group (the outfit behind the American Funds) launched two interval funds with KKR (see here and here) that include investments in public and private bonds.
- State Street’s new SPDR SSGA IG Public & Private Credit ETF (PRIV), launched in collaboration with Apollo Global Management (one of the largest private investment firms), stuffs private credit into an ETF. The two firms have also partnered on a target-date fund series geared to retirement accounts that allocates 10% of assets to private investments.
- The 401(k) servicing giant Empower is teaming up with seven firms to allow private assets into some of their clients’ retirement accounts later this year—see here.
As the rush to offer and sometimes push private markets onto unsuspecting investors picks up speed, now is a great time to educate yourself on their ins and outs and understand the reasons the fund industry is getting behind “democratization” with such energy.
Before I go on, let me put my cards on the table: I’m highly skeptical of most private investments. If you can somehow gain access to top-tier managers, it may be worth a go. But those managers are few and far between, often have no room for the little guy, and aren’t in any need of your dollars or mine. Otherwise, private investments just add complexity and fees while reducing transparency and liquidity—all without improving results or reducing risk.
So, my very short answer to the opening question is: No, you don’t need private investments in your portfolio.
Why the Push?
Before delving into what private investments are all about, it's worth asking, “Why now?” Why are private asset managers opening the gates to make their strategies and funds more widely accessible?
As I noted, the proponents of this push will tell you it is about “democratizing” access—giving smaller, everyday investors a seat at the table that was previously reserved for institutions and the wealthy. Their pitch, in a nutshell, is that everyone should have access to investments that can reduce risk and boost returns. It sounds very altruistic, right?
The more realistic response is that investment firms are searching for ways to grow. They’ve apparently tapped out the pocketbooks and wallets of their institutional and high-net-worth customers and are now looking down-market for growth.
To give just one example, the NACUBO-Commonfund Study of Endowments found that the average institution allocates 55% of its portfolio to private assets, such as real estate and “alternative strategies.” That’s a lot, and it implies that institutions are probably maxed out on private investments.
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