Latest / Masters in Business / Fran Kinniry on Private Equity Portfolio Investments (Podcast)

Transcript

Fran Kinniry on Private Equity Portfolio Investments (Podcast) · Masters in Business

0:00
Speaker 1: M This is Mesters in Business with Very Renaults on
0:06
Speaker 1: Bluebird Radio. This week. On the podcast, I have an
0:10
Speaker 1: extra special guest. Frank Kinnery has had an incredible career
0:15
Speaker 1: at the Vanguard Group. He is currently the global head
0:19
Speaker 1: of Private Equities, but he's been there for twenty three
0:22
Speaker 1: years working on things like portfolio construction and investment strategy.
0:27
Speaker 1: He is incredibly insightful and thoughtful person. He looks at
0:32
Speaker 1: the world from a very unique perspective relative to hey.
0:36
Speaker 1: He sits at at one of the largest investment managers
0:41
Speaker 1: in the world. Of Anger Group runs you know, over
0:44
Speaker 1: seven trillion dollars for thirty million clients, and so that
0:48
Speaker 1: makes him the perfect person to speak to about portfolios, equities, bonds,
0:55
Speaker 1: private equity. I found this conversation to be absolutely fascinating
1:00
Speaker 1: and I think you will also so with no further ado,
1:04
Speaker 1: my interview with Vanguard Groups Fran Kinnery. This is Mesters
1:11
Speaker 1: in Business with Very Results on Bluebird Radio. This week.
1:17
Speaker 1: Once again I have an extra special guest. His name
1:21
Speaker 1: is Fran Kinnery and he is Vanguard's global head of
1:25
Speaker 1: Private Investments. Previously, he was principal in the Investment Strategy
1:30
Speaker 1: Group and Global Head of Portfolio Construction at the seven
1:34
Speaker 1: trillion dollar Vanguard Group, where he has worked for twenty
1:37
Speaker 1: three years. Uh He is one of the people who
1:41
Speaker 1: helped create the concept of Advisor's Alpha, which focuses on
1:46
Speaker 1: advice and behavioral counseling. Last year, he was named to
1:50
Speaker 1: head up Vanguard's private equity initiative. My firm, Rituals Wealth Management,
1:55
Speaker 1: works with Vanguard. They're one of the biggest fund providers
1:59
Speaker 1: that we operate with, and I have been privileged to
2:02
Speaker 1: not only interview every CEO that Vanguard has ever had,
2:07
Speaker 1: some multiple times, but a number of other people from
2:10
Speaker 1: various departments research, stocks, bonds, etcetera, including Fran. This is
2:15
Speaker 1: our our second conversation, and I just wanted to make
2:18
Speaker 1: it clear and transparent that my firm has a relationship
2:23
Speaker 1: with Vanguard. Fran Kinnery, Welcome back to Masters in Business.
2:28
Speaker 1: Thanks Barry. It's great to be back on the show
2:30
Speaker 1: with you. So you've been at Vanguard since, but clearly
2:36
Speaker 1: this is a new role. Global head of Private Investments.
2:39
Speaker 1: Tell us about how this new initiative came about and
2:44
Speaker 1: you're rolling that. Yeah, I've been very lucky, very I've
2:47
Speaker 1: been there as you said, twenty three years, and I've
2:50
Speaker 1: had the great fortune to help Vanguard with three startups,
2:54
Speaker 1: which you know, a firm that's been around since and
2:58
Speaker 1: as large as we are too, who helped three startups
3:02
Speaker 1: has just been great for me and I'm just very
3:05
Speaker 1: humbled for that opportunity. I arrived in ninety seven. As
3:08
Speaker 1: you mentioned that, my role was to help Vanguards start
3:11
Speaker 1: its advice initiatives UM. My role was the head up
3:16
Speaker 1: the investment and financial planning methodology for our advice UH launch.
3:23
Speaker 1: Once that was up and running UM, in two thousand
3:26
Speaker 1: and one, they asked me to help start up Vanguard's
3:30
Speaker 1: investment Counseling and Research group and that was then rebranded
3:34
Speaker 1: to the Investment Strategy Group. That team was really responsible
3:39
Speaker 1: and my specific role asset class research, portfolio construction, financial planning,
3:45
Speaker 1: wealth planning, investor behavior UM and then as you mentioned,
3:50
Speaker 1: advisors out. So in that role I had covered the
3:54
Speaker 1: asset classes and had written several research reports on private equity,
3:59
Speaker 1: and so when the scene or leaders of Banguard decided
4:01
Speaker 1: to go into private equity, I was just very lucky
4:04
Speaker 1: and humbled that they selected me to lead the entry
4:07
Speaker 1: to market. Quite interesting so let's talk a little bit
4:12
Speaker 1: about the firm's history and philosophy. Uh. Jack Bogel was
4:16
Speaker 1: notorious for wanting to keep things simple and inexpensive, so
4:23
Speaker 1: much so he wasn't even thrilled with e t s,
4:26
Speaker 1: which were potentially traded every day. How can you do
4:30
Speaker 1: private equity in a way that's consistent with your founder's
4:35
Speaker 1: core principles? Yeah, and and Barry, you and I know
4:38
Speaker 1: each other, and and most people know Jack and I
4:42
Speaker 1: had a pretty close relationship. You up until his passing
4:45
Speaker 1: in two thousand and nineteen. I was very lucky to
4:48
Speaker 1: stay very close to him. We would catch up for
4:52
Speaker 1: lunch on a monthly basis. And I think, as you said,
4:55
Speaker 1: he was mostly concerned with ets and what they trade, right,
4:59
Speaker 1: because really an et F as an index fund, which
5:02
Speaker 1: was certainly JACKO was a champion of indexing, but distributed
5:06
Speaker 1: on an exchange rather than bought and sold directly at Vanguard,
5:11
Speaker 1: And so certainly he would believe in all of the
5:14
Speaker 1: attributes of ets, but he really was concerned would investors
5:18
Speaker 1: use them properly? And so I would show him the data,
5:22
Speaker 1: especially the Vanguard ets. These were building block portfolios that
5:26
Speaker 1: were not traded. Certainly, there's five or six institutional products
5:32
Speaker 1: that trade with high velocity, but they're mostly used by
5:36
Speaker 1: institutional investors and more of a surrogate or replacement for
5:41
Speaker 1: the overnight exposure. And so, but if you look at
5:45
Speaker 1: the majority of ets, they have really good holding periods
5:50
Speaker 1: and used correctly. We would say that private equity would
5:54
Speaker 1: you know, had Jack been alive, would would embrace the offer.
6:00
Speaker 1: A lot of people do not know that Vanguards started.
6:02
Speaker 1: Jack started Vanguard as an actively managed shop, and so
6:07
Speaker 1: what Jack really stood for was taking institutional, world class
6:12
Speaker 1: investment offers down to main street investors and so private
6:16
Speaker 1: equity and trying to democratize or bring private equity to
6:22
Speaker 1: retail main street investors. I think he would be cheering
6:25
Speaker 1: me on huh. Well, the one thing you don't have
6:27
Speaker 1: to worry about with private equity is access trading. And
6:30
Speaker 1: we'll talk about the liquidly premium or illiquidity premium in
6:35
Speaker 1: a little bit, but let's talk about the concept of
6:38
Speaker 1: Vanguard bringing private equity to retail investors. Tell us about
6:43
Speaker 1: how this process is going. Yeah, so the process is
6:47
Speaker 1: going very well, very We launched in February right before
6:51
Speaker 1: you know, the COVID shutdowns in February. We decided to
6:56
Speaker 1: stage this in very thoughtfully and very care fill a
7:00
Speaker 1: meaning that we started. Vanguard has an O c I
7:03
Speaker 1: O business, which is an institutional asset management business where
7:08
Speaker 1: the endowment and foundation turns over the keys to us
7:11
Speaker 1: to manage the portfolio. Private equity has been used in
7:16
Speaker 1: some of the most sophisticated endowments and foundations and sovereign
7:20
Speaker 1: wealth funds for thirty or forty years and has really
7:24
Speaker 1: improved outcomes for those who have used private equity well.
7:29
Speaker 1: So we started in our O c I O space
7:31
Speaker 1: as I mentioned February. You may have seen the press
7:35
Speaker 1: release or the audience may have seen the press release
7:37
Speaker 1: in May. We then extended that to our ultra high
7:41
Speaker 1: net worth retailed direct investors, and then later this year
7:45
Speaker 1: we will be expanding that further to our personal advice clients,
7:50
Speaker 1: which is our retail advisory business UM at the qualified
7:54
Speaker 1: level right there are still regulatory gates here, so our
7:58
Speaker 1: offer right now will be at to qualify the QP
8:01
Speaker 1: level and the accredited level UM In in short, it's
8:06
Speaker 1: having a certain asset and wealth threshold to make it
8:10
Speaker 1: through that gap. So I'm kind of fascinated by how
8:13
Speaker 1: Vanguard does this on a regular basis. Something starts out
8:18
Speaker 1: essentially with an institutional audience and eventually works its way
8:23
Speaker 1: down a series of tears until it's at mom and
8:26
Speaker 1: pop mainstream investors. So you did this with just about
8:32
Speaker 1: everything else that Vanguard offers, but let's stick with private equity.
8:35
Speaker 1: It starts out institutional, it goes to outsourced chief investment officers,
8:41
Speaker 1: accredited investors, advised investors. Will this eventually make its way
8:47
Speaker 1: down to mom and pop main street investors? That's our goal. Um,
8:53
Speaker 1: if you read the original press released, Kim Buckley, who
8:56
Speaker 1: is our CEO, and I have worked on this closely together.
8:59
Speaker 1: Our all is to really bring this to main street investors.
9:04
Speaker 1: But I want to be clear under the right conditions vary,
9:07
Speaker 1: and with what I mean by that is, um, we
9:10
Speaker 1: don't want to put private equity out there for retail
9:12
Speaker 1: investors to just buy this direct, meaning that an investment
9:16
Speaker 1: can come in and and and put fifty percent of
9:18
Speaker 1: their assets. We believe it has a really strong place
9:22
Speaker 1: where we are designing the portfolio. You know, I was
9:26
Speaker 1: the head of portfolio construction for seventeen years here at Vanguard.
9:30
Speaker 1: So whether we are doing it through our own advice
9:32
Speaker 1: or we are saying that what the allocation will be
9:35
Speaker 1: as part of a multi asset class portfolio and our
9:38
Speaker 1: O c I O business or in our personal advisor business.
9:42
Speaker 1: But then there's also embedded advice things like target retirement funds,
9:46
Speaker 1: where you know, we actually set the asset allocations, we
9:50
Speaker 1: rebalance it. Uh, these are long duration investors and we
9:54
Speaker 1: think that that would be a very very prudent way
9:57
Speaker 1: to bring private equity to main street investor ters. So
10:00
Speaker 1: we're working on that. UM, we're going to keep working
10:04
Speaker 1: on that, and that is our long term vision. What
10:06
Speaker 1: does the timeline look like for this, because I imagine
10:11
Speaker 1: this is a slow, gradual, iterative process that involves a
10:16
Speaker 1: series of let's try this, we'll find out what the
10:19
Speaker 1: bugs are. All right, let's fix that. Now we have
10:22
Speaker 1: this issue we have to resolve. What does this timeline
10:25
Speaker 1: look like over the next decade. Yeah, the timelines are,
10:28
Speaker 1: as you mentioned, very difficult, um and tricky, But I
10:32
Speaker 1: think you characterize that correctly. By us starting in the
10:35
Speaker 1: O C I O space, you're talking about very large
10:38
Speaker 1: endowments where the peer group has used private equity. Then
10:42
Speaker 1: we go to the ultra high net worth five million
10:45
Speaker 1: plus UM direct or advised, We're gonna learn a lot,
10:50
Speaker 1: We're gonna fix a lot of things, UM, And at
10:54
Speaker 1: the end of the day, you know, we are going
10:56
Speaker 1: to put all of our efforts to bring us to
10:58
Speaker 1: main street investors because we have you think, target retirement
11:01
Speaker 1: funds UM could really benefit from private equity when you
11:05
Speaker 1: look at the returns and the diversification and the duration
11:09
Speaker 1: of these investors, you know, thirty to seventy year horizons. UM.
11:13
Speaker 1: So we're going to do it very thoughtfully, very carefully,
11:16
Speaker 1: and so I really don't have a timeline for you
11:18
Speaker 1: very You spent seventeen years doing portfolio construction at Vanguard.
11:25
Speaker 1: Where does private equity fit into an investor's portfolio? Yeah,
11:30
Speaker 1: the way we're thinking about it very after extensive, as
11:33
Speaker 1: you mentioned, seventeen years of research. We would think that
11:37
Speaker 1: the private equity allocation comes out of your public equity allocation.
11:41
Speaker 1: And sometimes it's just easy to use the numbers of
11:44
Speaker 1: the maps. Let's say a client is sixty forty equity
11:49
Speaker 1: fixed income. We would think that the allocation comes out
11:53
Speaker 1: of that sixty component. So let's just use a number.
11:56
Speaker 1: Let's just say thirty percent. An investor decides to be
12:00
Speaker 1: thirty percent private equity, So instead of being sixty forty
12:04
Speaker 1: stock bond, you know, the thirty on sixty would be eighteen, right,
12:09
Speaker 1: So now they would be eighteen percent private equity and
12:12
Speaker 1: forty two percent public equity maintaining their in bonds. And
12:18
Speaker 1: when you look at that, so you're not really increasing
12:20
Speaker 1: the risk budget of the portfolio. Um. In fact, you
12:24
Speaker 1: actually have diversification because all of these operating private companies
12:28
Speaker 1: are not in the public universe, the correlations are not
12:32
Speaker 1: at one, and you have return enhancements. So um, you know,
12:36
Speaker 1: it is a really viable, prudent asset class to add
12:40
Speaker 1: into a portfolio if it's funded out of the right way,
12:44
Speaker 1: and we would be funding this from public equity. My
12:47
Speaker 1: reaction was because I immediately thought you were talking thirty thirty.
12:52
Speaker 1: But what I misinterpreted you you meant of the sixty,
12:56
Speaker 1: not of the overall. That's right, so stead of you
13:01
Speaker 1: would be forty two public equity, eighteen private equity and
13:07
Speaker 1: then still bonds. All right, So let's talk a little
13:10
Speaker 1: bit about the various private equity firms you work with.
13:14
Speaker 1: There are thousands of them. How did you begin the
13:18
Speaker 1: process of narrowing it down to a handful of them
13:22
Speaker 1: and what was the vetting process like? Yeah, so while
13:25
Speaker 1: many investors may know Vanguard is indexing, we are actually
13:29
Speaker 1: one of the largest UM and actually have one of
13:31
Speaker 1: the most successful active management practices UM in in the
13:35
Speaker 1: asset management space. I mentioned that we started Vanguard as
13:40
Speaker 1: an actively managed firm, and so we have, you know,
13:43
Speaker 1: our entire history of doing manager oversight and selection and search,
13:49
Speaker 1: and so when you know, we we decided to go
13:52
Speaker 1: into the space, the next step was canvassing the managers
13:57
Speaker 1: who are world class and so we you know, we
14:01
Speaker 1: we went through a process of you know, we have
14:03
Speaker 1: a database and we started with narrative down to let's
14:06
Speaker 1: say forty plus firms. We then had deep meetings with
14:11
Speaker 1: about ten of those firms, and then we actually but
14:14
Speaker 1: you know, did site visits on site and and then
14:18
Speaker 1: had them visit us. With five firms, we we narrowed
14:21
Speaker 1: that down to two um where we really spent another
14:25
Speaker 1: extra deep dive and then we selected Harbor Best UM
14:28
Speaker 1: as the final winner of the partnership to move forward with.
14:33
Speaker 1: And so we had a long history of understanding what
14:37
Speaker 1: works in active management are actively managed funds without performed
14:42
Speaker 1: consistently their peers and access about performed the indexes they
14:46
Speaker 1: track on the public side, and harbor Best performance has
14:50
Speaker 1: continually to outperform the median and average private equity manager.
14:54
Speaker 1: So you know, we we can do the due diligence
14:57
Speaker 1: for our investors and that's that's a lot uh to
15:01
Speaker 1: put forward for the average investor. And so we are
15:03
Speaker 1: very comfortable that we have found a great partner in
15:06
Speaker 1: harbor Vest. So I want to talk a little more
15:08
Speaker 1: about harbor Vest in a moment. But first I should
15:12
Speaker 1: have said this, and I admitted this, but let me
15:14
Speaker 1: clarify this. Uh. It's more than thirty of the seven
15:19
Speaker 1: something trillion dollars in assets are are actively managed, and
15:24
Speaker 1: Vanguard's ability to identify managers who can be successful is
15:31
Speaker 1: a core competency. Am I getting that right? And please
15:35
Speaker 1: correct me on on my numbers in terms of and
15:39
Speaker 1: seven trillion. I know those numbers move around a lot. Yeah,
15:43
Speaker 1: that's right, Verry, And and size has never been a
15:45
Speaker 1: goal for Vanguard, So I know people will look at
15:47
Speaker 1: the seven trillion or the look at the one point
15:50
Speaker 1: seven trillion. We have an active and that's what we have. UM,
15:54
Speaker 1: we believe that our size is you know, first off,
15:57
Speaker 1: we have thirty million investors, so not Vanguard's assets. Vanguard
16:02
Speaker 1: is the steward of thirty million investors who have trusted
16:07
Speaker 1: us with their assets because we have served them well.
16:10
Speaker 1: We believe that the investment population is a very very
16:13
Speaker 1: smart population. There's an incredible competition in the mutual fund space.
16:18
Speaker 1: There's actually, I believe three times the amount of mutual
16:21
Speaker 1: funds that there are individual stocks. So there's a lot
16:25
Speaker 1: of choice out there. And I think our size and
16:27
Speaker 1: our growth has come from serving investors very well on
16:31
Speaker 1: investment performance and on client service, and so our size
16:35
Speaker 1: is really a tribute to you know, serving them well.
16:39
Speaker 1: But as you mentioned, we are one of the largest
16:41
Speaker 1: active managers. We continuously are in the seventy five top
16:46
Speaker 1: death style relative to the active peer groups across all
16:49
Speaker 1: the asset classes, you know, so taxable, fixed income, tax
16:53
Speaker 1: exem fixed income, and equity. And then lastly, it's it's
16:57
Speaker 1: one thing to beat your peer group, but we actually
16:59
Speaker 1: out for form the indexes that we track, So I
17:01
Speaker 1: know this movement to indexing has been strong, it's probably
17:05
Speaker 1: been warranted. UM and indexing should outperform the average manager,
17:10
Speaker 1: but that loses sight of that not all managers are average.
17:13
Speaker 1: If you can find talent and you deliver that at
17:16
Speaker 1: a reasonable cost. The evidence would show that Vanguard's active
17:19
Speaker 1: funds together have added about fifty basis points on top
17:24
Speaker 1: of the indexes that they tracked, and that's very meaningful
17:26
Speaker 1: if you can calm down that over thirty to forty
17:29
Speaker 1: years UM. And so our investors have been very well
17:32
Speaker 1: served with our active offer. So let's talk about harbor Vest.
17:36
Speaker 1: Your your partner on this private equity for investors at Vanguard.
17:42
Speaker 1: How did you land on them? And tell us what
17:45
Speaker 1: they bring that is unique compared to some of the
17:49
Speaker 1: people that might have come in second or third. Yeah,
17:53
Speaker 1: I think it all starts with UM. You know how
17:56
Speaker 1: we think about what matters in active management UM, And
18:00
Speaker 1: that all starts with the firm and the people. Those
18:03
Speaker 1: are the two critical components the firm. We want to
18:07
Speaker 1: make sure that they are putting clients first. UM. And
18:12
Speaker 1: I know that's the common terminology put clients first. But
18:16
Speaker 1: all of our interactions with harbor Vests where basically, if
18:20
Speaker 1: we treat our clients well, if we give them high outcomes.
18:25
Speaker 1: Growth follows as opposed to growth being the mission. The
18:30
Speaker 1: mission should be serving clients. Well, you know, the Simon
18:33
Speaker 1: spent a quote of you know, leaders eat last, and
18:36
Speaker 1: so we think about that that our asset owners at Vanguard,
18:39
Speaker 1: and it became very clear to us that the asset
18:41
Speaker 1: owners of Harbor vests the clients come first. The owners
18:46
Speaker 1: eat last. They take the spoils that are left over
18:49
Speaker 1: after the clients do well. And we heard that time
18:52
Speaker 1: and time again. It shows and how their partnership is structured,
18:57
Speaker 1: meaning that economics and we see this time and time
19:00
Speaker 1: again when economics are very widely spread out throughout the
19:04
Speaker 1: organization that attracts the top talent um. And this is
19:08
Speaker 1: a talent in people business. So when ownership is public,
19:13
Speaker 1: or ownership is controlled by let's say a few founding founders, um,
19:18
Speaker 1: you may not get necessarily the talent when the economics
19:23
Speaker 1: and the rewards are spread out much more democratically. And
19:28
Speaker 1: so we found a firm that has post to forty
19:31
Speaker 1: years of experience where a structure and alignment of client
19:36
Speaker 1: first and the people and the culture. And then lastly
19:41
Speaker 1: we look at performance and the performance has just been
19:44
Speaker 1: outstanding relative to the medium and average private equity offer
19:49
Speaker 1: quite interesting. Let's talk a little bit about the vanguard
19:53
Speaker 1: approach to private equity, starting with returns. What sort of
19:58
Speaker 1: returns this vanguard looking for from pe relative to you know,
20:04
Speaker 1: playing vanilla stocks and bots. Yeah, our our return expectation,
20:08
Speaker 1: again is all formed off of our deep research verry UM.
20:12
Speaker 1: So if you were to look at the median private
20:14
Speaker 1: equity firm relative to you know, let's say the public
20:19
Speaker 1: markets in all world public markets, you get about average returns, right,
20:24
Speaker 1: You're gonna get you know, returns on top of the market.
20:26
Speaker 1: So it's all about manager selection. Um. But here you're
20:31
Speaker 1: familiar with the quartile rankings of public managers where they're
20:34
Speaker 1: quite wide, but in private equity they're they're almost two
20:38
Speaker 1: x that meaning that the top quartile um has returns
20:43
Speaker 1: somewhere in the high twenties, and the fourth quartile is
20:46
Speaker 1: negative fourteen UM and then in around you know, quartile
20:50
Speaker 1: three and two, it's it's right around uh, you know,
20:52
Speaker 1: the average. So this is all about manager selection, and
20:57
Speaker 1: if you were able to you don't have to be perfect, right,
21:00
Speaker 1: So if you were to just throw darts um and
21:03
Speaker 1: and get a manager in each quartile. So in each
21:07
Speaker 1: quart tile, so you would say you have no skill, uh,
21:12
Speaker 1: my team and I have done this work, you would
21:14
Speaker 1: end up with a return that's about a hundred and
21:16
Speaker 1: seventy basis points over public markets with zero skill. That's
21:21
Speaker 1: probably the illiquidity premium all asset classes like on the
21:26
Speaker 1: run off the run treasuries or e t s that
21:29
Speaker 1: are the same basket of ets the more you know
21:33
Speaker 1: traded they are. So the one seven is probably first off,
21:37
Speaker 1: you know, a liquidity premium one seven if you have
21:39
Speaker 1: no manager skill would be something that you would not
21:42
Speaker 1: want to leave on the table. But if you even
21:45
Speaker 1: have moderate skill, where you would select instead of the five,
21:51
Speaker 1: but you were able to select out of quart tile one,
21:55
Speaker 1: in two and out of quartile three and four, the
22:00
Speaker 1: returns quickly approach four hundred basis points over public markets.
22:07
Speaker 1: And then if you have higher skill. Again this you know,
22:09
Speaker 1: I'm not saying this is easy, but if you're able
22:11
Speaker 1: to select of your managers in the top quartile in
22:17
Speaker 1: quartile two, in quartile three, and then ten percent in
22:23
Speaker 1: quartile four, the returns are about seven hundred basis points
22:28
Speaker 1: over harbor vests. Experience has been in around that range
22:33
Speaker 1: seven to eight hundred basis points over public markets. Vanguard
22:37
Speaker 1: being conservative, we we believe the illiquidity premium will drop.
22:42
Speaker 1: It is averaged in the past about three hundred basis points,
22:46
Speaker 1: but let's say it's half of that at one five
22:48
Speaker 1: and close to that. No skill and of harbor vests
22:52
Speaker 1: can do even half of what they have done in
22:55
Speaker 1: the past and and are just able to get slightly
22:58
Speaker 1: better than manager selection um. Our forward looking estimate is
23:03
Speaker 1: our investors will get between three and four hundred basis points,
23:07
Speaker 1: are three to four percent more then public equity, and
23:11
Speaker 1: that's going to be very significant in this low return world.
23:15
Speaker 1: Happen to listen just recently to interview with Jack Brennan,
23:18
Speaker 1: and you talked about the sixty forty portfolio, and I
23:21
Speaker 1: share your concerns in Jack's concerns like where are returns
23:24
Speaker 1: going to come from? And so to be able to
23:26
Speaker 1: add three or four percent over public equity and funded
23:30
Speaker 1: from public equity, we think that that is extremely prudent
23:34
Speaker 1: for investors to do so, no doubt, four hundred basis
23:38
Speaker 1: points gets a lot of people's attention, but there are
23:41
Speaker 1: a lot of other reasons to consider private equity. Let's
23:45
Speaker 1: let's talk about correlation. How closely are the returns in
23:50
Speaker 1: private equity correlated to what we see in the public markets. Yeah,
23:55
Speaker 1: so the correlations and you would have to get this
23:58
Speaker 1: twofold right because the carly aans um since a lot
24:02
Speaker 1: of private equity doesn't mark, meaning they're not marked to market.
24:06
Speaker 1: The public markets marked to market every single day, and
24:10
Speaker 1: so um, you were if you were to mark to
24:15
Speaker 1: market the assets like if you have him and and
24:17
Speaker 1: Harborfest does this and the industry does this, So you
24:20
Speaker 1: can create an algorithm or a beta to try to
24:24
Speaker 1: get what your daily marks would be. And even if
24:27
Speaker 1: you were to do that, you would see correlations below
24:30
Speaker 1: one somewhere. Let's say you know point eight point eight five. Um,
24:35
Speaker 1: But again you and I Berry have talked a lot
24:37
Speaker 1: about behavioral finance and advisors out but was built on
24:40
Speaker 1: behavioral finance. The fact that these do not mark and
24:43
Speaker 1: the prices are stale, and one could say that this
24:46
Speaker 1: is a fantom benefit, and I'm not disagreeing, But if
24:51
Speaker 1: you were only to price the total stock market or
24:53
Speaker 1: the SMP five hundred every six months on the lag,
24:57
Speaker 1: I believe investors would do better because a lot times,
25:00
Speaker 1: we're reacting each and every day, um to what happened yesterday,
25:06
Speaker 1: and does that really matter when our horizon is twenty
25:09
Speaker 1: forty years? So we believe that this will provide diversification
25:13
Speaker 1: and behavioral benefits because of how private equity works, right.
25:17
Speaker 1: The advantage of homes are that you don't get a
25:19
Speaker 1: price every day, and we're recording this the day after
25:24
Speaker 1: it looked like the markets we're gonna be off two
25:27
Speaker 1: and on a day when the markets have bounced back
25:29
Speaker 1: one percent. That sort of volatility can easily distract investors
25:34
Speaker 1: from the long term. So let's stick with private equity
25:38
Speaker 1: and long term. Given how expensive public stocks are and
25:44
Speaker 1: by many measures we are at the upper range of valuations,
25:49
Speaker 1: private equity multiples have followed along and PE is uh
25:55
Speaker 1: about as pricey as as stocks are. More or less,
25:59
Speaker 1: it's it's a rough estimate. What are the concerns about
26:02
Speaker 1: private equity multiples being as pricey as they are today? Yeah?
26:06
Speaker 1: I think you're set up there. Barry is correct. Public
26:09
Speaker 1: equities are probably in their you know, top, and private
26:13
Speaker 1: equity has followed um. But I also think that somewhat
26:18
Speaker 1: misses the point we you know, we do not believe
26:20
Speaker 1: markets have an expiration date. You would have said public
26:23
Speaker 1: equity and private equity were overvalued. In they've found on
26:27
Speaker 1: more than double UM. We have found that people that
26:31
Speaker 1: market time markets UM. Really. A lot of people get
26:34
Speaker 1: celebrated for calling the top and ninety nine, or they
26:37
Speaker 1: get celebrated for calling the top and O seven. But
26:39
Speaker 1: I'm looking at you know, I'm looking at charts of
26:41
Speaker 1: my SMP five hundred at Vanguard and the private equities.
26:44
Speaker 1: If you were the worst market time or ever and
26:47
Speaker 1: you bought in March with two thousand UM, the harvardst
26:51
Speaker 1: Fund for that vintage was up ten and a half percent,
26:55
Speaker 1: and the US equity market over that time horizons up
26:58
Speaker 1: three point six. So let's say like the ten to
27:00
Speaker 1: fifteen year return off of that same thing. You know,
27:04
Speaker 1: if you bought at the top of O sight UM.
27:07
Speaker 1: You know, investors are I I think the connectrum here
27:10
Speaker 1: is what do you do? You you take money off
27:12
Speaker 1: the table and put it in sixth income instruments that
27:15
Speaker 1: are yielding you know, somewhere below one and a half percent.
27:18
Speaker 1: And so market timing has proven to be UM. You
27:23
Speaker 1: probably more investors create more bear markets on their own
27:27
Speaker 1: and opportunity costs by using simple metrics like valuations to
27:32
Speaker 1: try to call the tops, and so we would advise
27:35
Speaker 1: against that. The second thing I would say, Verry, we
27:38
Speaker 1: also talked about this will be funded from public equity.
27:42
Speaker 1: So if you are sixty forty, you're not really increasing
27:46
Speaker 1: the value at risk or the risk budget of portfolio.
27:49
Speaker 1: You would be moving that sixty down to forty two
27:53
Speaker 1: and putting it in private equity at eighteen. And so
27:57
Speaker 1: we would do that all day. Whether it's high valuation,
28:00
Speaker 1: medium valuation, or low valuation, it makes a lot of
28:03
Speaker 1: sense and you're locking in a longer term time horizon
28:07
Speaker 1: for that portion of the portfolio. Have you considered other
28:12
Speaker 1: types of private investments, things like venture capital or hedge
28:16
Speaker 1: funds beyond private equity. Yeah, so maybe I could walk
28:20
Speaker 1: through what is in this offer because it actually is
28:24
Speaker 1: a very diversified offer that we have built for our investors.
28:29
Speaker 1: Um you mentioned some of them. So this will have
28:33
Speaker 1: diversification of stage, so it will have venture capital within
28:37
Speaker 1: the harbor Best vanguard offering, the growth equity, and venture
28:42
Speaker 1: capital growth equity as a later stage venture. Uh. This
28:45
Speaker 1: portfolio will have somewhere around twenty to growth equity and
28:51
Speaker 1: venture UM. It'll then the remainder of that will be
28:54
Speaker 1: in buyouts, which are traditional leverage buyouts. Those are more
28:58
Speaker 1: seasoned companies, more mature companies, So you do get a
29:03
Speaker 1: lot of diversification of stage UM. You'll have geographic diversification
29:08
Speaker 1: within here. So think of this as the total stock
29:10
Speaker 1: market if you will, of private equity. It'll be globally diversified,
29:15
Speaker 1: stage diversified like in the in the public markets we
29:18
Speaker 1: use growth and value and large it's small. Uh, this
29:22
Speaker 1: will be geographically diversified. It will have venture capital to
29:25
Speaker 1: have buy out, it will have primary investments, secondary investments, UM,
29:31
Speaker 1: and direct co invest So it is a real turn
29:33
Speaker 1: key solution that at the end of the day it
29:37
Speaker 1: will have you know, six to eight hundred operating companies.
29:41
Speaker 1: And that would be hard for any investor that's let's
29:44
Speaker 1: say under two billion dollars to try to replicate because
29:49
Speaker 1: most of these managers are very specialized inside of hard vest, right,
29:53
Speaker 1: so uh, what what makes a great venture capital manager
29:57
Speaker 1: might be different than an Asian buy out manager. And
30:01
Speaker 1: so this will have thirty to forty general partners inside
30:05
Speaker 1: with seven operating companies, so very hard for any investor
30:11
Speaker 1: under let's say two billion dollars to kind of replicate
30:14
Speaker 1: this offer. So it is very well diversified. So that
30:18
Speaker 1: number of companies under a variety of managers, under a
30:23
Speaker 1: variety of sectors. It leads me to ask the question,
30:27
Speaker 1: are you going to run into any capacity constraints if
30:30
Speaker 1: you ramp this up? How big can this scale at Vanguard?
30:34
Speaker 1: Can this be a trillion dollar line of business? Yeah?
30:38
Speaker 1: I would say maybe address that two ways, one um
30:42
Speaker 1: and maybe we'll get to the fees of private equity later.
30:45
Speaker 1: But let me address that a little bit here. Harbor
30:48
Speaker 1: Vests and the general partners that they work with are
30:52
Speaker 1: mostly compensated on performance based fees UM. It's known as
30:57
Speaker 1: carry in the private equity space, and so the economics
31:02
Speaker 1: to them really start to accrue once they hit a
31:06
Speaker 1: hurdle rate above eight per cent. The management fee that
31:09
Speaker 1: they get pretty much just covers the operating costs of
31:13
Speaker 1: what they do. So they do not want to give
31:15
Speaker 1: away capacity that they do not believe they can source
31:19
Speaker 1: without returns that are double digits and above double digits,
31:22
Speaker 1: because that would not be good for their business. So
31:25
Speaker 1: they watch capacity both at the general partner level and
31:29
Speaker 1: at harbor best level. Uh. They they it's probably one
31:32
Speaker 1: of the things they are you know, obviously since the
31:35
Speaker 1: economics are tied to that, they're going to watch that
31:37
Speaker 1: very closely. Um. So we have a runway with them,
31:40
Speaker 1: and we think it's a you know, it's an intermediate runway.
31:44
Speaker 1: But if we do well here and we are able
31:46
Speaker 1: to democratize the sasset class um, I would say very
31:49
Speaker 1: much like we started with one active manager, the Wellington's group, uh,
31:55
Speaker 1: and now we have close to thirty active managers. So
31:58
Speaker 1: we are continuing and will continue to think about do
32:02
Speaker 1: we need manager too and then manager three? And we
32:05
Speaker 1: feel we are very well equipped to source a second
32:10
Speaker 1: and third manager when that time comes. But together harbor
32:15
Speaker 1: Vest and Vanantgard are looking at capacity very closely. So
32:18
Speaker 1: let's put some flesh on on those numbers, on those fees.
32:23
Speaker 1: I'm assuming when you talk about, you know, just the
32:27
Speaker 1: cost of of of administrative expenses on a fund, that's
32:31
Speaker 1: gonna be some and private equity obviously much more expensive
32:35
Speaker 1: than managing an e T F for or an index.
32:38
Speaker 1: I'm gonna guess that's going to be about fifty basis points.
32:41
Speaker 1: And then that eight percent uh, that's a pretty good
32:44
Speaker 1: long term SMP five return number. Their fees are their
32:50
Speaker 1: out performance over that eight percent? Am I getting that
32:53
Speaker 1: more or less right? That's right. The carry does not
32:56
Speaker 1: start to kick in until a return hurdle the percent,
33:01
Speaker 1: And so that's why most private equity managers are shooting
33:03
Speaker 1: for you know, fifteen to twenty gross returns and and
33:10
Speaker 1: and the best ones have been able to do that.
33:12
Speaker 1: And that's where the economics really lie. And so I
33:15
Speaker 1: think it gets back to aligned interests. Right when most
33:18
Speaker 1: of the feast sack is performance based and above some hurdle,
33:23
Speaker 1: everyone is operating under the same incentives and so um
33:27
Speaker 1: you know that that that makes private equity a very
33:29
Speaker 1: aligned UH investment and asset class to client outcomes quite interesting.
33:35
Speaker 1: You mentioned you want to be diversified globally in terms
33:40
Speaker 1: of the investment. I'm assuming that that means everywhere around
33:43
Speaker 1: the world. What about the investors? Is this the same?
33:47
Speaker 1: Is this US only or is this going to be
33:49
Speaker 1: open to global investors? So today we're starting in the US,
33:54
Speaker 1: just like we're staging this out by clients segment and
33:59
Speaker 1: working um you know where we are mostly working with
34:05
Speaker 1: qualified investors and the regulation that's here. Eventually we will
34:10
Speaker 1: you know, try to move this down market to main
34:12
Speaker 1: street US investors, and eventually we are looking at how
34:16
Speaker 1: we could utilize this in some of our um non
34:20
Speaker 1: US offerings, whether it be single fund solutions or whether
34:23
Speaker 1: it be in our advice outside of the US. But
34:26
Speaker 1: again no timelines on that, but that is again probably
34:29
Speaker 1: where we will be at some point in the future. Interesting,
34:33
Speaker 1: and you had mentioned you were working with advisors on this.
34:37
Speaker 1: What do you think the process is going to be
34:39
Speaker 1: like before this reaches retail? Is this going to be
34:44
Speaker 1: you know, a long process or do you think you're
34:46
Speaker 1: going to get there sooner rather than than later. Um,
34:50
Speaker 1: I mean our hope is to get there sooner rather
34:52
Speaker 1: than later. You know, we talked earlier about a sixty
34:55
Speaker 1: forty portfolio. I mean, I think the main street investor,
34:59
Speaker 1: let's just take a school teacher and nurse, you know,
35:03
Speaker 1: who is saving diligently for retirement. UM. I don't know
35:08
Speaker 1: where the returns are going to come from. I mean,
35:10
Speaker 1: most of the fixed income investments are below inflation, and
35:14
Speaker 1: so you know, the sooner we can get private equity
35:18
Speaker 1: into main street investors, and where we are the allocator
35:21
Speaker 1: of it, and we do it in a thoughtful way. Um.
35:23
Speaker 1: I think it will have long term compounding advantages for
35:27
Speaker 1: these investors who needed the most, who are saving diligently,
35:31
Speaker 1: doing the right thing, saving with a long duration and
35:35
Speaker 1: just hoping to get real returns in retirement. There's no
35:38
Speaker 1: real reason to save. Um. You know, saving is a
35:41
Speaker 1: deferment of future consumption, and if you're saving and getting
35:45
Speaker 1: a negative real return that that really isn't a trade
35:48
Speaker 1: off that most people you know would welcome. And so
35:51
Speaker 1: we're trying to make sure that we can generate real
35:54
Speaker 1: returns for investors saving for retirement. So all of our
35:58
Speaker 1: energies and efforts are on the send. I just don't
36:00
Speaker 1: have a timeline, so let's stick with retirement. Is this
36:04
Speaker 1: better suited for qualified tax DEFERD accounts for one case?
36:09
Speaker 1: And on IRA's versus traditional portfolios? And how might this
36:15
Speaker 1: fit into a target date fund? Yeah, I would say
36:19
Speaker 1: both set of investors use it well. I know you
36:22
Speaker 1: work with high net worth families, Barry, and I do
36:24
Speaker 1: it well. I work with a lot of family offices
36:26
Speaker 1: and high net worth taxable clients, and a lot of
36:29
Speaker 1: clients think about after tax returns. UM. Not to get
36:33
Speaker 1: too technical, but this is a good portfolio for tax
36:38
Speaker 1: and wealth and estate planning. Uh. It follows a J curb,
36:41
Speaker 1: which means it has some early year losses which are
36:44
Speaker 1: valuable to high net worth families. And it's a great
36:47
Speaker 1: estate planning because you can actually get assets out of
36:51
Speaker 1: your estate at let's say X, and then fifteen years
36:54
Speaker 1: later they come out hopefully at two to two and
36:56
Speaker 1: a half times X. So we do see there is
36:59
Speaker 1: a very very popular private equity strategy in you know,
37:04
Speaker 1: some of our high it worth trusts and estate planning clients.
37:08
Speaker 1: On the other end of the spectrum is just main
37:10
Speaker 1: street investors who are saving in a target retirement funds
37:14
Speaker 1: and then for target date funds which would be in
37:16
Speaker 1: a defined contribution plan um where Vanguard would you know,
37:21
Speaker 1: obviously do the multi asset class portfolio construction and the
37:26
Speaker 1: allocation and the rebalancing um. And these are long duration investors.
37:32
Speaker 1: Typically they have a thirty year investment horizon and then
37:36
Speaker 1: maybe a fifty to sixty year life horizon. And the
37:39
Speaker 1: other great thing about the rfs is we know exactly
37:42
Speaker 1: when they're going to retire and when they're going to
37:45
Speaker 1: shift from accumulation to decumulation and retirement income. So we
37:50
Speaker 1: could have a private equity glide path um that that
37:54
Speaker 1: we mentioned earlier. Let's say you have fift to private
37:58
Speaker 1: equity when you're third of years away to retirement, and
38:02
Speaker 1: we just stopped investing in that as you approach five
38:05
Speaker 1: to ten years prior to retirements. So when you start
38:09
Speaker 1: retirement income, private equity lands at zero O. So we
38:13
Speaker 1: we see it as a perfect place um for both
38:17
Speaker 1: ends of the spectrum and really for all investors who
38:21
Speaker 1: are looking to have real returns. Quite interesting, So let's
38:25
Speaker 1: talk a little bit about investor appetite. How strong is
38:30
Speaker 1: the demand for this sort of investment from the public today. Yeah,
38:36
Speaker 1: I have the investment demand for private equity both on
38:39
Speaker 1: our launch, but private equity in general has been setting records.
38:42
Speaker 1: You probably read in the in the press. Fundraising in
38:46
Speaker 1: nineteen twenty and and so far in twenty one has
38:49
Speaker 1: just been off the charts. One could argue at cyclical,
38:53
Speaker 1: or others could argue at secular. I'm on the secular
38:55
Speaker 1: side of this um. You know, we do see that
38:58
Speaker 1: some investors are lead being the edge of you know, progressiveness,
39:04
Speaker 1: and so you see the top endowments and foundations and
39:07
Speaker 1: sovereign wealth funds have been in private equity since the
39:10
Speaker 1: early ninety nineties. They've increased their allocations. I think this
39:14
Speaker 1: is the rest of the market catching up Verry, so
39:17
Speaker 1: the demand is quite strong. I I do not see
39:21
Speaker 1: it as cyclical. We've been through three of the largest
39:24
Speaker 1: bear markets in the market's history, when you look at
39:27
Speaker 1: the Internet tech tech bubble, and then the a O
39:29
Speaker 1: nine global financial crisis, and then the quick flip in COVID,
39:33
Speaker 1: and yet you continue to see private equity grow. Uh.
39:37
Speaker 1: So I believe this is structural, and I believe it's
39:40
Speaker 1: because of the investment case, both on diversification and what
39:43
Speaker 1: it can do to improve outcomes on performance. So I
39:47
Speaker 1: do not see this as being cyclical. I would be
39:49
Speaker 1: shocked if five and ten and fifteen years that private
39:52
Speaker 1: equity is not larger than it is today. Interesting. So
39:56
Speaker 1: there's a quote, and I think it's yours that that
39:58
Speaker 1: I want to share. Quote. Restrictions on who can invest
40:02
Speaker 1: in private equity should be based on investment horizon and
40:06
Speaker 1: not income or wealth unquote. Discuss Yeah, So I think
40:12
Speaker 1: the current regulatory has a lot of merit right now.
40:16
Speaker 1: The gates to get into private equity are wealth and income,
40:19
Speaker 1: and I think it does have merit, And I think
40:21
Speaker 1: the regulators really do care about investors, and they care
40:24
Speaker 1: deeply about investors, and they would argue that these investors
40:28
Speaker 1: could afford h to lose assets when they have this
40:31
Speaker 1: type of wealth and income threshold. But I would argue,
40:34
Speaker 1: let's let's just say you take someone who is a
40:36
Speaker 1: high spend or someone who's spending eight or nine percent
40:39
Speaker 1: of their portfolio, whether it's just a high net worth
40:41
Speaker 1: client or an entertainer or a sports figure, even if
40:45
Speaker 1: they have ten million dollars and they're spending a lot
40:47
Speaker 1: of money, I would not recommend private equity to that.
40:50
Speaker 1: I mean, it is an ill liquid asset UM and
40:53
Speaker 1: and so I really think it's it's much more appropriate
40:57
Speaker 1: to think about what is the horizon of the investor or?
41:01
Speaker 1: Um is the an asset being managed by a fiduciary.
41:06
Speaker 1: Uh So you know what we talked about target retirement
41:08
Speaker 1: funds or our advice at Vanguard, we are managing those
41:12
Speaker 1: assets and we would rebalance those assets. So I think
41:16
Speaker 1: when it is professionally managed and it meets the time
41:19
Speaker 1: horizon and the investor is in accumulation or slight accumulation,
41:26
Speaker 1: that's where I would put private equity. But if someone
41:29
Speaker 1: walked in and they had, you know, fifteen million dollars
41:32
Speaker 1: and making a million dollars in a year, but they
41:34
Speaker 1: were spending two or three and you and I bury
41:36
Speaker 1: no clients just like that, uh what they would qualify,
41:40
Speaker 1: But I would not put private equity in their portfolio.
41:42
Speaker 1: So I understand why wealth and income really around those
41:47
Speaker 1: clients could afford to lose it. But if you take
41:49
Speaker 1: a step back from that, um, I think time horizon,
41:53
Speaker 1: whether you're the accumulation or decumulation, and whether it's professionally
41:58
Speaker 1: managed by a multi asset class professional, would be the
42:02
Speaker 1: real gates of prudence as opposed to just wealth and income.
42:06
Speaker 1: That makes a lot of sense. The illequidly premium only
42:10
Speaker 1: works if you don't need to tap into that capital
42:14
Speaker 1: for that entire lock up period. Um. But I'm sure
42:18
Speaker 1: there are pretty substantial penalties for getting out of a
42:23
Speaker 1: private equity investment early. How do you manage that if
42:27
Speaker 1: someone's circumstances change and they need the cash sooner versus
42:33
Speaker 1: their original plans. Yeah, I think there there is a
42:37
Speaker 1: secondary market barry that is growing and getting closer and
42:41
Speaker 1: closer to fair market value. UM. I would say it's
42:44
Speaker 1: like any other asset class we've seen, including ets. If
42:47
Speaker 1: you're trying to sell out because the market is under
42:51
Speaker 1: pressure or contagion, UH, you should expect a large discount
42:55
Speaker 1: like we saw in O eight oh nine and during
42:57
Speaker 1: in COVID. Even in high quality fixed income, you see
43:01
Speaker 1: discounts under stress. However, if if your circumstances changed and
43:06
Speaker 1: you just want to get out of private equity and
43:08
Speaker 1: it's not in concasion, and you want to do it
43:11
Speaker 1: at you know, over time, like in a quarterly or
43:14
Speaker 1: semiannual a lot in the secondary market as accommodate windows
43:19
Speaker 1: where you can sell your private equity back, and the
43:22
Speaker 1: discounts are not that extreme, uh, if you're doing it
43:26
Speaker 1: in the qualified times that the secondary market allows liquidity events.
43:32
Speaker 1: So I would say it's you know, it's twofold. If
43:33
Speaker 1: you're selling because of market concasion or in market stress,
43:37
Speaker 1: expect a large discount like you would in most of
43:39
Speaker 1: their asset classes. If you're doing it because of non
43:42
Speaker 1: market related events and you do it in the windows
43:45
Speaker 1: that are allowed, H, the discount will still be there.
43:48
Speaker 1: I want to be very clear, UM, no different than
43:51
Speaker 1: trying to sell me disciole bonds or corporate bonds. UM.
43:54
Speaker 1: But but it would not be that detrimental. But it
43:57
Speaker 1: is clear. We want investors to understand that they are
44:00
Speaker 1: ring a long term investment and hopefully there's some circumstances
44:03
Speaker 1: do not change that would warrant them selling it. So
44:06
Speaker 1: that's one of the unique challenges of private equity versus
44:09
Speaker 1: you know, playing vanilla stocks and bonds. What are other
44:12
Speaker 1: challenges that are unique to this asset class. I think
44:17
Speaker 1: the other challenges are manager selection and manager access. Most
44:22
Speaker 1: of the top managers are filled over subscribed, and so
44:29
Speaker 1: for you are or I Barry or even you know,
44:32
Speaker 1: if you're on sit on a committee of an endowment,
44:35
Speaker 1: if you're going to start private equity today, the list
44:39
Speaker 1: of general partners that you will get access to is
44:42
Speaker 1: probably a very small list, and it's probably maybe not
44:44
Speaker 1: the top quartile list. And that gets back to why
44:47
Speaker 1: we went with harbor Vest thirty eight years of doing
44:49
Speaker 1: this UM and and by being an investor early and consistently,
44:55
Speaker 1: access is granted to those who have been there first
44:59
Speaker 1: and who have been there insistantly. So I think it
45:01
Speaker 1: will be a challenge for someone who is entering private
45:04
Speaker 1: equity today to get top quartile managers unless they're working
45:08
Speaker 1: with someone like Vanguard or someone like a harbor Vest,
45:11
Speaker 1: because access will not be there if you try to
45:14
Speaker 1: just you know, do this on your own. And if
45:16
Speaker 1: I recall correctly, Vanguard has something like thirty million clients.
45:21
Speaker 1: Is that number about Riot? That is right? Yeah, that's right, Barry.
45:25
Speaker 1: So you know a lot of times people look at
45:26
Speaker 1: our size and a U M. But I would really
45:28
Speaker 1: direct you know, the a U M is you know,
45:31
Speaker 1: we are just the professional steward of thirty million investors.
45:36
Speaker 1: It's their assets, They own the assets. We are managing
45:41
Speaker 1: those assets on on the behalf of these investors thirty
45:44
Speaker 1: million who have entrusted us to do well for them.
45:48
Speaker 1: So clearly you have the expertise in terms of custodying
45:54
Speaker 1: assets and reporting and doing the performance reporting as well.
45:58
Speaker 1: But private equity seems like a unique set of I
46:02
Speaker 1: don't want to say nightmares, but it's so complicated given
46:07
Speaker 1: how money is not only placed but drawn down over
46:11
Speaker 1: time time and investing um in funds as needed as
46:15
Speaker 1: opportunities come along. What were some of the real complications
46:20
Speaker 1: of setting up the back office of private equity when
46:25
Speaker 1: you're working with Vanguard and Harbor Vest. Yeah, I'm glad
46:28
Speaker 1: you asked that, Barry, because a lot of times the
46:30
Speaker 1: focus is all on the investment and performance and the
46:33
Speaker 1: diversification and the outcomes. But you are correct to the
46:35
Speaker 1: client experience and how this works is not as simple
46:39
Speaker 1: as buying an ep F for a mutual fund um.
46:42
Speaker 1: And we spend a lot of time and technology dollars
46:48
Speaker 1: um to make sure that this would you know, not
46:50
Speaker 1: only would the investment experience be world class, but the
46:53
Speaker 1: client experience would be world class. So we put a
46:56
Speaker 1: lot of time and energy and effort to make sure
46:59
Speaker 1: that the interface and how the capital calls work UM.
47:04
Speaker 1: And how everything now being digital online really helps improve
47:10
Speaker 1: the experience for clients. So not only do we we
47:13
Speaker 1: believe we will have a world class investment experience, but
47:16
Speaker 1: we believe we will have a world class client experience UM.
47:20
Speaker 1: And I think it's again, why you know, thinking about
47:22
Speaker 1: it more as an advised part of an advised multi
47:26
Speaker 1: asset class where we are moving all of the money around,
47:30
Speaker 1: whether it's rebalancing their capital calls, certainly self directed ultra
47:34
Speaker 1: high net worth clients who are used to this, are
47:36
Speaker 1: used to how this works. Um But I think in
47:39
Speaker 1: an advised capacity, whether it's through our o C, i OH,
47:43
Speaker 1: our personal advisor services, or maybe one day in a TRF,
47:47
Speaker 1: we can alleviate a lot of that mechanical cash flow
47:52
Speaker 1: capital call, moving it from public markets to private markets
47:56
Speaker 1: and back. And I think that will only improve the
48:00
Speaker 1: experience of clients. They won't don't see one nab A
48:02
Speaker 1: one one turtle return of all their investments rolled up,
48:07
Speaker 1: and I think the experience will be enhanced from that.
48:10
Speaker 1: So I have a few questions left before I get
48:12
Speaker 1: to my favorite questions, and let's stick with Vanguard. I
48:18
Speaker 1: haven't heard many of your competitors looking into private equity
48:23
Speaker 1: as an mass asset class for their investors. What is
48:27
Speaker 1: it about Vanguard? What do you bring to the table
48:30
Speaker 1: that makes you so uniquely suited to do this? You
48:34
Speaker 1: seem to be the only large asset manager that's looking
48:38
Speaker 1: to forget democratizing stocks. You're looking to democratize private equity. Yeah.
48:45
Speaker 1: I think that's a student observation, Verry. I think it
48:47
Speaker 1: gets back to our roots and our mission and why
48:50
Speaker 1: Vanguard was founded. Um. No, indexing was around before we
48:55
Speaker 1: started Vanguard. I mean, it was an institutional you know,
48:57
Speaker 1: you know, Samsonite and well sparked go. So indexing was around,
49:02
Speaker 1: active management around, and so Vanguard's whole purpose and mission
49:07
Speaker 1: was to take you know, institutional investment offerings that have
49:12
Speaker 1: served these large asset pools well down to main street,
49:17
Speaker 1: mom and pop investors. So I think that's probably why
49:20
Speaker 1: you see us trying to democratize or equal access this
49:25
Speaker 1: too investors who need it the most. Obviously, sovereign wealth
49:29
Speaker 1: funds and endowments have been very well served by private equity,
49:33
Speaker 1: and they don't need Vanguard necessarily to do private equity.
49:36
Speaker 1: And so our goal and our mission from our founding
49:40
Speaker 1: was to make sure that the little person, and you know,
49:43
Speaker 1: the mom and pop investor, the main street investor, was
49:46
Speaker 1: on a level footing with the largest sovereign wealth funds
49:49
Speaker 1: and the largest endowments and foundations. So I think this
49:52
Speaker 1: plays right in our entire routs and our mission, in
49:55
Speaker 1: our history. So I love this quote of yours on
49:57
Speaker 1: this this basic concept quote. It took us thirty five
50:01
Speaker 1: years to do this on indexing, twenty years to do
50:04
Speaker 1: it on active funds. So maybe twenty years from now,
50:07
Speaker 1: private equity and its access to world class managers for
50:11
Speaker 1: the average investor will look very much like indexing did
50:15
Speaker 1: over the course of nineteen seventy to Yeah, so I
50:20
Speaker 1: think that's exactly right. That is our hope and that's
50:23
Speaker 1: our aspiration. When I arrived at Vanguard in it's hard
50:27
Speaker 1: to believe indexing assets were around eight percent of mutual
50:31
Speaker 1: fund assets UM, and so it did take quite a while. Uh.
50:36
Speaker 1: You may remember, you know, indexing was called on an
50:38
Speaker 1: American UM. The advisor community did not want any part
50:42
Speaker 1: of indexing because the value probably Let this gets back
50:45
Speaker 1: to some of the work we've done on advisors alpha
50:47
Speaker 1: the value proposition of most advisors where hired me and
50:51
Speaker 1: I'll perform, you know, outperformed the index through tactical allocation
50:56
Speaker 1: or managers selection. And so to see, uh, you know,
51:00
Speaker 1: the diffusion of indexing over the last twenty years has
51:04
Speaker 1: been amazing, and you know, we hope and we you know,
51:08
Speaker 1: think that this would be the right thing to do, uh,
51:10
Speaker 1: to try to follow that same template for private equity
51:14
Speaker 1: for main street investors. So let's use that template and
51:18
Speaker 1: and look forward ten or twenty years from now when
51:22
Speaker 1: you're looking at the ensuing forty period, what would be
51:29
Speaker 1: your measure of success for this project? What metrics are
51:33
Speaker 1: you going to look at to be able to make
51:35
Speaker 1: the determination? Hey, this was every bit as successful as
51:39
Speaker 1: indexing and active management was in the earlier iterations of Vanguard. Yeah,
51:45
Speaker 1: so I mentioned a couple of times. Growth and cash
51:48
Speaker 1: flow has never been Vanguard's mission. We believe that growth
51:53
Speaker 1: and cash flow is an outcome of serving investors well
51:58
Speaker 1: and serving them prudently. So my success metrics would be
52:02
Speaker 1: that the performance comes through somewhere like we indicated three
52:06
Speaker 1: to four paces points over, it's provided diversification, and that
52:10
Speaker 1: investors who need private equity the most, And I would
52:14
Speaker 1: say that those are those who are saving for retirement,
52:17
Speaker 1: those who do not have access to it now have
52:20
Speaker 1: access to it. And if those things three things hold
52:24
Speaker 1: good performance, good diversification, good client experience and access is granted,
52:31
Speaker 1: we would we would expect our share of the private
52:34
Speaker 1: equity market UH to look quite large. But again the
52:40
Speaker 1: goal is not to have van Guard be a leader
52:42
Speaker 1: in private equity or to build assets or to take
52:45
Speaker 1: on growth. We think that would be an outcome of
52:48
Speaker 1: in serving investors very very well, and investors typically vote
52:52
Speaker 1: with their feet, and that's what we have seen. It's
52:53
Speaker 1: a smart population and we think it's an outcome of
52:57
Speaker 1: being served very well. Quite interesting. I know I only
53:01
Speaker 1: have you for a limited amount of time, so let's
53:04
Speaker 1: jump to our favorite questions that we ask all of
53:07
Speaker 1: our guests, starting with, UH, tell us what you've been
53:12
Speaker 1: streaming during this period of work from home? What are
53:15
Speaker 1: you watching on Netflix or Amazon Prime? Or what podcasts
53:18
Speaker 1: are keeping you entertained? Yes, I think kind of new
53:23
Speaker 1: early on. My My brother is in internal medicine and
53:26
Speaker 1: runs the I C You here at Penn, So I
53:28
Speaker 1: kind of knew early on that this might play out
53:30
Speaker 1: longer to stay from home than than most And so
53:34
Speaker 1: I decided to revisit some of the all time classic
53:38
Speaker 1: or at least, in my opinion, the all time classic
53:40
Speaker 1: TV series for a second and in some instances a third.
53:43
Speaker 1: But these are big time commitments, So things like Breaking Bad, Uh,
53:48
Speaker 1: The Americans, and Homeland I have rewatched and I've enjoyed
53:52
Speaker 1: every second. So I went back to at least what
53:54
Speaker 1: I would call as some of the classics. But but
53:58
Speaker 1: but as a big time commitment, and I thought I
54:00
Speaker 1: would have the time to do that, and I'm glad
54:01
Speaker 1: I did that. Quite interesting. Tell us about your early
54:05
Speaker 1: mentors who helped shape your career. Yeah, I kind of
54:09
Speaker 1: breaking into three stages of my career. Very first and
54:13
Speaker 1: foremost are my parents and my grandparents. My grandparents were
54:17
Speaker 1: very involved and my parents were very very selfless, I think,
54:21
Speaker 1: give me unconditional love and support and just were amazing
54:25
Speaker 1: role models. And I think that was the foundation of
54:27
Speaker 1: all of my good luck that followed from that, and
54:31
Speaker 1: if I moved from there, I would say my my
54:33
Speaker 1: first experience outside of business school, I was hired by
54:37
Speaker 1: Harold Katz and Cat's family office, which was run by
54:41
Speaker 1: Terry gabrielle chief investment officer. This guy was a c
54:45
Speaker 1: f A from like the seventies and um, you know,
54:48
Speaker 1: told me right away a three years to get the
54:50
Speaker 1: cf A. So I got the c f A at
54:52
Speaker 1: a very young age and he taught me everything. I
54:54
Speaker 1: you know, just sat at his hip and had a
54:56
Speaker 1: world class experience on how to value companies, UM forensic
55:01
Speaker 1: accounting and to be able to like just rip through
55:04
Speaker 1: a company and figure out what it was worth. So
55:07
Speaker 1: both Harold Katz and Terry Gabriel I think we're the
55:10
Speaker 1: early part of my career. And if those two things
55:13
Speaker 1: aren't lucky enough, at thirty two, I ended up at Vanguard,
55:16
Speaker 1: and and uh, you know, just had such a luck
55:19
Speaker 1: to be able to work with Jack Bogel closely. Um,
55:23
Speaker 1: you know, Jack Brennan and I worked on many things together.
55:26
Speaker 1: We're still in contact with him on a pretty regular basis.
55:30
Speaker 1: And and and then Tim Buckley, who's our current CEO.
55:33
Speaker 1: I've worked with him, you know, pretty much since I
55:35
Speaker 1: landed at Vanguard. I couldn't find three more better mentors
55:40
Speaker 1: if I tried, and the three of them, so I've
55:42
Speaker 1: just been very blessed. Yeah, that's that's quite a murderous
55:45
Speaker 1: row of of people to help guide your career. Uh,
55:49
Speaker 1: let's talk about books. Tell us some of your favorites
55:52
Speaker 1: and what are you reading right now? So some of
55:54
Speaker 1: my favorites, and its fried back to my what I'm streaming.
55:57
Speaker 1: I've read you know, probably a dozen times, would be
56:01
Speaker 1: too by talib Fooled by Randomness is probably my favorite,
56:05
Speaker 1: and the others Anti Fragile highly recommended for those who
56:09
Speaker 1: have not read them. Uh. Then then Michael Lewis is
56:12
Speaker 1: the undoing project. It's it's really about the special relationship
56:16
Speaker 1: between condomen and diversity and all they've been able to
56:19
Speaker 1: accomplish around human behavior. And I'll stick with you know,
56:24
Speaker 1: Condomen and Diversity. Uh. Their book Judgment Under Uncertainty is
56:28
Speaker 1: still one of the classics of all time as far
56:31
Speaker 1: as currently, um, you know mostly what I read. You know,
56:35
Speaker 1: it's just so much to stay on top of the
56:37
Speaker 1: investment news and the news commentary. So I'm very grateful
56:41
Speaker 1: for you, Barry, you doing an aggregation each night. I
56:45
Speaker 1: look forward to, you know, getting your email, and you know,
56:47
Speaker 1: there's so much news out there, So I would say
56:49
Speaker 1: on a daily basis, I'm using some of the key
56:52
Speaker 1: aggregators always use yours as first and foremost. So the
56:56
Speaker 1: daily news stream is a lot, and I saved the
56:59
Speaker 1: books for when I'm you know, have some downtime on
57:01
Speaker 1: summer vacation over the holidays. Really interesting and thank you
57:05
Speaker 1: for uh those kudos. What sort of advice would you
57:09
Speaker 1: give to a recent college grad who was interested in
57:13
Speaker 1: a career in either investment management or private equity, John
57:18
Speaker 1: would I would tell him to go for it. I
57:20
Speaker 1: see so many opportunities on the horizon in investment banking,
57:24
Speaker 1: and private equity or you know what you do there
57:27
Speaker 1: as a wealth advisor. I see all three being win
57:30
Speaker 1: win win career opportunities. You know, it's a win first
57:34
Speaker 1: and foremost for the clients that you serve, and I
57:36
Speaker 1: think that makes you know, you feel really good about
57:38
Speaker 1: what you're doing every day that you're actually putting your
57:40
Speaker 1: clients first. But also personally, it's it's a profession that
57:43
Speaker 1: if you do it well, the rewards would come to
57:46
Speaker 1: you and your family, and that's you know, that's always
57:48
Speaker 1: a good thing. And then lastly, it's a continuous learning.
57:51
Speaker 1: Right The markets are always changing, uh you know you are.
57:55
Speaker 1: The headlines change daily and weekly. So what I'm learning
57:59
Speaker 1: in today is so much different than I did last
58:01
Speaker 1: year and year before that. So to me, these are
58:04
Speaker 1: not zero sum game activities, but these are positive sum
58:08
Speaker 1: game activities. So I would highly recommend anyone thinking about
58:11
Speaker 1: going into the investment for wealth planning world. And our
58:14
Speaker 1: final question, what do you know about the world of
58:17
Speaker 1: investing today? You wish you knew twenty five or so
58:21
Speaker 1: years ago when you were first getting started in the nineties,
58:24
Speaker 1: long before you ended up at Vanguard. Yeah, I wish
58:28
Speaker 1: I knew today and had a better way to track
58:32
Speaker 1: opportunity costs. Um. And what I mean by that, Barry
58:36
Speaker 1: is you know, um, we we often only judge what
58:39
Speaker 1: we did, yet we don't judge what we could have done.
58:44
Speaker 1: And you know we mentioned as a couple of times.
58:46
Speaker 1: I think more bear markets have been created by investors
58:51
Speaker 1: own beliefs in what the future will look like than
58:54
Speaker 1: actual bear markets themselves. And if we actually kept score
58:59
Speaker 1: personally or individually of what we did versus what we
59:03
Speaker 1: should have done, I think the gap is going to
59:05
Speaker 1: really surprise people. Um. Also, the opportunity costs of of
59:10
Speaker 1: of comfort. Right, Yeah, we're talking about where bonds are today.
59:13
Speaker 1: Under no one wants to lose in COVID or in GFC,
59:20
Speaker 1: but if you have a thirty year horizon, didn't matter
59:23
Speaker 1: over that one or two years. So we pay a
59:26
Speaker 1: huge opportunity cost for comfort if you have a thirty
59:29
Speaker 1: year horizon or a twenty year horizon. I just would
59:32
Speaker 1: ask everyone to examine the opportunity costs they are creating
59:36
Speaker 1: for themselves for such comfort. Right. And you know, the
59:40
Speaker 1: the equity risk premium has been about five basis points
59:43
Speaker 1: over bonds probably likely to hold, if not be above that.
59:48
Speaker 1: We've talked about private equity being three to four over that,
59:51
Speaker 1: so maybe eight to ten over bonds and so yeah,
59:55
Speaker 1: we are risk averse creatures. We hate loss, and I
59:59
Speaker 1: think that's nap troll to hate loss and all the
1:00:01
Speaker 1: loss a version. But just do it with eyes wide
1:00:04
Speaker 1: open on what the opportunity cost you are creating for
1:00:08
Speaker 1: the comfort of short term volatility. Huh makes sense, Fran,
1:00:13
Speaker 1: This has really been very fascinating. Thank you for being
1:00:16
Speaker 1: so generous with your time. We have been speaking with
1:00:20
Speaker 1: Fran Kinary. He is Vanguard's global head of private Investments.
1:00:25
Speaker 1: If you enjoy this conversation, well be sure and check
1:00:29
Speaker 1: out any of our previous three hundred and fifties something
1:00:32
Speaker 1: prior discussions. You can find those wherever you feed your podcast,
1:00:37
Speaker 1: fix iTunes, Spotify, a cast, wherever. We love your comments, feedback,
1:00:42
Speaker 1: end suggestions right to us at m IB podcast at
1:00:46
Speaker 1: Bloomberg dot net. What Fran was discussing the daily reading
1:00:50
Speaker 1: list that goes out every day at seven am. You
1:00:53
Speaker 1: can sign up for that uh at Ridoltz dot com.
1:00:57
Speaker 1: Check out my weekly column on Bloomberg dot com slash Opinion.
1:01:01
Speaker 1: Follow me on Twitter at rid Halts I would be
1:01:04
Speaker 1: remiss if I did not thank the wonderful team that
1:01:06
Speaker 1: helps put these conversations together each week. Maroufal is my
1:01:11
Speaker 1: audio engineer. Harris Walt is my producer. This week, my
1:01:17
Speaker 1: project manager is Tracy Walsh. Michael Batnick is my head
1:01:21
Speaker 1: of research. I'm Barry Rich Halts. You've been listening to
1:01:25
Speaker 1: master some in Business on Bloomberg Radio