Transcript: Fran Kinniry on Private Equity



The transcript from this week’s, MiB: Fran Kinniry, Vanguard, is below.

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BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. Fran Kinniry has had an incredible career at the Vanguard Group, he is currently the global head of private equities but he’s been there for 23 years working on things like portfolio construction and investment strategy. He is incredibly insightful and thoughtful person, he looks at the world from a very unique perspective relative to, hey he sits at one of the largest investment managers in the world, the Vanguard Group runs over $7 trillion for 30 million clients and so that makes him the perfect person to speak to about portfolios, equities, bonds, private equity, I found this conversation to be absolutely fascinating and I think you will also.

So with no further ado my interview with Vanguard Group’s Fran Kinnery.

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: This week, once again I have an extra special guest, his name is Fran Kinnery is Vanguard global head of private investments. Previously he was principal in the investment strategy group and global head of portfolio construction at the $7 trillion Vanguard Group where he has worked for 23 years. He is one of the people who helped create the concept of advisors alpha which focuses on advice and behavioral counseling. Last year he was named to head up Vanguard’s private equity initiative.

My firm, Ritholtz Wealth Management works with Vanguard, they are one of the biggest fund providers that we operate with and I have been privileged to not only interview every CEO that Vanguard has ever had some multiple times but a number of other people from various departments, research, stocks, bonds, et cetera, including Fran, this is our second conversation and I just wanted to make it clear and transparent that my firm has a relationship with Vanguard.

Fran Kinnery, welcome back to Masters in Business.

FRAN KINNERY, VANGUARD GROUP, GLOBAL HEAD OF PRIVATE INVESTMENT: Thanks, Barry, it’s great to be back on the show with you.

RITHOLTZ: So you’ve been at Vanguard since 1997 but clearly this is a new role, global head of private investments, tell us about how this new initiative came about and your role in that?

KINNIRY: Yes, I’ve been very lucky, Barry, I’ve been there, as you said, 23 years and I’ve had the great fortune to help Vanguard with three startups which you know, a firm that’s been around since 1975 and as large as we are to help three startups is just been great for me and I’m just very humbled for that opportunity.

I arrived in 1997 as you mentioned, and my role was to help Vanguard start it’s advice initiatives, my role was to head up the investment and financial planning methodology for our advice launch in 1997. Once that was up and running, in 2001, they asked me to help start up Vanguard’s investment counseling and research group and that was then rebranded to the investment strategy group. That team was really responsible and my specific role, asset class research, portfolio construction, financial planning, wealth planning, investor behavior, and then as you mentioned, advisors alpha.

So in that role, I had covered the asset classes and had written several research reports on private equity and so when the senior leaders at Vanguard decided to go into private equity, I was just very lucky and humbled that they selected me to lead the entry to market.

RITHOLTZ: Quite interesting. So let’s talk a little bit about the firm’s history and philosophy.

Jack Bogle was notorious for wanting to keep things simple and inexpensive so much so he wasn’t even thrilled with ETF’s which were potentially traded every day. How can you do private equity in a way that’s consistent with your founder’s core principles.

KINNIRY: Yes, and Barry, you and I know each other and close to, you know, Jack and I had a pretty close relationship you know, up until his passing in 2019, I was very lucky to stay very close to him, we would catch up for lunch on a monthly basis. And I think as you said, he was mostly concerned with ETFs and what they trade, right?

Because really an ETF is an index fund which was certainly Jack was a champion of indexing but distributed on an exchange rather than bought and sold directly at Vanguard. And so certainly he would believe in all of the attributes of ETFs but he really was concerned what investors use them properly and I would show him the data especially the Vanguard ETFs, these were building block portfolios that were not traded. Certainly, there are five or six institutional products that trade with high velocity but they’re mostly used by institutional investor and more of a surrogate or a placement for you know, overnight exposure.

And so but if you look at the majority of ETF, they have really good holding periods and used correctly. We would say that private equity would be, had Jack been alive, would embrace the offer. A lot of people do not know that Vanguard started, Jack started Vanguard actively managed shop and so what Jack really stood for was taking institutional world-class investment offers down to Main Street investors and so private equity and trying to democratize or bring private equity to retail Main Street investors, I think he would be cheering me on.

RITHOLTZ: Well, the one thing you don’t have to worry about with private equity is excess trading and we’ll talk about the liquidity premium or illiquidity premium in a little bit but let’s talk about the concept of Vanguard bringing private equity to retail investors. Tell us about how this process is going.

KINNIRY: Yes, so the process is going very well, Barry, we launched in February right before the COVID shutdowns of February 2020, we decided to stage this in very thoughtfully and very carefully, meaning that we started — Vanguard has an OCIO business which is an institutional asset management business where the endowment and foundation turns over the keys to us to manage the portfolio. Our private equity has been used in some of the more sophisticated endowments and foundations of sovereign wealth funds for 30 or 40 years and has really, you know, improved outcomes for those who have used private equity well.

So we started in our OCIO space as I mentioned February of 2020, you may have seen the press release or the audience may have seen the press release in May. We then extended that to our ultrahigh net worth retail direct investors and then later this year, we will be expanding that further to our personal advise clients which is our retail advisory business at the qualified level, right? There are still regulatory gates here so our offer right now will be at the qualified, the QP level and the accredited level.

In short, it’s having a certain asset and wealth threshold to make it through that gate.

RITHOLTZ: So I’m kind of fascinated by how Vanguard does this on a regular basis, something starts out essentially with an institutional audience and eventually works its way down a series of tears ‘til it’s at mom-and-pop mainstream investors.

So you did this with just about everything else that Vanguard offers but let’s stick with private equity. It starts out institutional goes to outsourced Chief investment Officers, accredited investors, advised investors, will this eventually way make its way down to mom-and-pop Main Street investors?

FAIRCHILD: That’s our goal if you read the original press release, Tim Buckley, who is our CEO and I worked on this closely together. Our goal is to really bring this to Main Street investors. But I want to be clear under the right conditions Barry, and what I mean by that is we don’t want to put private equity out there for retail investors to just buy this direct meaning that an investor can come in and put 50 percent of their assets.

We believe it has a really strong place where we are designing the portfolio. You know I was the head of portfolio construction for 17 years here at Vanguard so whether we’re doing it through our own advice or we are saying that what the allocation will be as part of a multi-asset class portfolio in our OCIO business or in our personal advisor business.
But there’s also embedded advice, things like target retirement funds or where your we actually set the asset allocations, we rebalance it, these are long-duration investors and we think that that would be a very, very prudent way bringing private equity to Main Street investors so we’re working on that and we’re going to keep working on that and that is our long-term vision.

RITHOLTZ: What does the timeline look like for this? Because I imagine this is a slow gradual iterative process that involves a series of let’s try this, we will find out what the bugs are. All right, let’s fix that, now we have this issue we have to resolve. What does this timeline look like over the next decade?

KINNIRY: Yes, the timelines are as you mentioned very difficult and tricky, but I think you characterized that correctly by us starting in the OCIO space, you are talking about very large endowments where the peer group has used private equity then we go to the ultrahigh net worth 5 million plus direct or advised, we are going to learn a lot, we’re going to fix a lot of things, and at the end of the day, you know, we are going to put all of our efforts to bring us to Main Street investors, because we actually think target retirement five could really benefit from private equity when you look at the returns and the diversification and the duration of these investors, you know, 30 to 70 year horizons, so we’re going to do it very thoughtfully, very carefully, and so I really don’t have a timeline for you, Barry.

RITHOLTZ: You spent 17 years doing portfolio construction at Vanguard, where does private equity fit into an investor’s portfolio?

KINNIRY: You know, the way we are thinking about it, Barry, after you know, extensive, as you mentioned, 17 years of research, we would think that the private equity allocation comes out of your public equity allocation, and sometimes it’s just easy to use the numbers or the math, so let’s say a client is 60-40, 60 percent equity 40 percent fixed income, we would think that the allocation comes out of that 60 component.

So let’s just use a number, let’s just say 30 percent that investor decides to be 30 percent private equity.

RITHOLTZ: Hey now.

KINNIRY: So instead of being 60-40 stock bond, you know, the 30 on 60 would be 18, right? So now they would be 18 percent private equity and 42 percent public equity maintaining their 40 percent in bonds and when you look at that, you’re not really increasing the risk budget of the portfolio, in fact, you actually have diversification because all of these operating private companies are not in the public universe, the correlations are not at one, and you have return enhancement.

So you know, it is a really viable, prudent, asset class to add into a portfolio if it’s funded out of the right way, and we would be funding this from public equity.

RITHOLTZ: My reaction was because I immediately thought you were talking 30-30-40, but what I misinterpret is you meant 30 percent of the 60, not 30 percent of the overall.

KINNIRY: That’s right, so instead of 30-30-40, you would be 42 public equity, 18 private equity and then still 40 percent on bonds.

RITHOLTZ: All right, so let’s talk a little bit about the various private equity firms you work with, there are thousands of them, how did you begin the process of narrowing it down to a handful of them and what was the vetting process like?

KINNIRY: Yes, so many investors may know Vanguard is indexing, we are actually one of the largest and actually have one of the most successful active management practices in the asset management space.

I mentioned that we started Vanguard as an actively managed firm and so we have, you know, our entire history of doing manager oversight and selection and search and so when it, you know, we decided to go into the space, the next step was canvassing the managers who are world-class and so we, you know, we went through a process of, you know, we have a database and we started with narrowed it down the let’s say 40 plus firms.

We then had deep — meetings with about 10 of those firms and then we actually bought you know, did site visit on site and then had them visit us with five firms, we narrowed that down to two where we really spent another extra deep dive and then we selected HarbourVest as the final winner of the partnership to move forward with.

And so we have a long history of understanding what works in active management, our actively managed funds have outperformed consistently their pears and actually have outperformed the index as they track on the public side and HarbourVest’s performance has continually, to outperform the median and average private equity manager.

So we can do the due diligence for our investors and that’s a lot to put forward for the average investor. And so we are very comfortable that we have found a great partner in HarbourVest.

RITHOLTZ: So I want to talk a little more about HarbourVest in a moment but first I should’ve said this time it is this but let me clarify this. It’s more than 30 percent of the 7 something trillion dollars in assets are actively managed and Vanguard’s ability to identify managers who can be successful is a core competency, am I getting that right and please correct me on my numbers in terms of 30 percent and 7 trillion, I know those numbers move around a lot.

KINNIRY: Yes, that’s right, Barry. And size has never been a goal for Vanguard so I know people will look at the 7 trillion or they will look at the 1.7 trillion we have in active and that’s what we have. We believe that our size is, you know, first off, we have 30 million investors so it’s not Vanguard’s assets, Vanguard is the steward of 30 million investors who have trusted us with their assets because we have served them well.

We believe that the investment population is a very, very smart population, there’s incredible competition in the mutual fund space, there’s actually, I believe, three times the amount of mutual funds that there are individual stocks.


KINNIRY: So there’s a lot of choice out there and I think our size and our growth has come from serving investors very well on investment performance and on client service and so our size is really a tribute to you know, serving them well but as you mentioned, we are one of the largest active managers, we continuously are in the 75th top decile relative to the active peer group across all the asset classes you know, so taxable fixed income, tax exempt fixed income, and equity. And then lastly, it’s one thing to beat your peer group we actually outperformed the indexes that we track.

So I know this movement to indexing has been strong, it’s probably been warranted and indexing should outperform the average manager but that loses sight of that not all managers are average if you can find talent and you deliver that at a reasonable cost, the evidence would show that Vanguard’s active funds together have added about 50 to 100 basis point on top of the indexes that they track, and that is very meaningful if you can compound that over 30 to 40 years, and so our investors have been very well served with our active offer.

RITHOLTZ: So let’s talk about HarbourVest, your partner on this private equity for investors at Vanguard, how did you land on them and tell us what they bring that is unique compared to some of the people that might’ve come in second or third?

KINNIRY: Yes, I think it all starts with, you know, how we think about what matters in active management, and that all starts with the firm and the people, those are the two critical components.

As a firm, we want to make sure that they are putting client first and I know that is a common terminology, put clients first but all of our interactions with HarbourVest were basically if we treat our clients well, if we give them high outcomes, growth follows as opposed to growth being the mission. The mission should be serving clients well, you know, the Simon’s quote of you know, leaders eat last, and so we think about that.

There are asset owners at Vanguard and it became very clear to us that the asset owners of HarbourVest, the clients come first, the owners eat last, they take the spoils that are left over after the clients do well and we heard that time and time again, it shows in how their partnership is structured meaning that economics, and we see this time and time again when economics are very widely spread out throughout the organization, that attracts the top talent and this is a talent and people business.

So when ownership is public or ownership is controlled by let’s say a few founding founders, you may not get necessarily the talent when the economics and the rewards are spread out much more democratically.

And so we found a firm that has close to 40 years of experience with the structure and alignment of client first and the people in the calls for and then lastly we look at performance and their performance has just been outstanding relative to the median and average private equity offer.

RITHOLTZ: Quite interesting.

Let’s talk a little bit about the Vanguard approach to private equity starting with returns. What sort of returns is Vanguard looking for from PE relative to the you know, plain-vanilla stocks and bonds?

KINNIRY: Yes, our return expectation again is all formed off of our deep research, Barry, so if you were to look at the median private equity firm relative to you know, let’s say the public markets and all world public market, you get about average returns, you are going to get, you know, returns on top of the market. So it’s all about manager selection but here, you are familiar with the quartile rankings of public managers where they are quite wide, but in private equity, they are almost 2x that meaning that the top quartile has returns somewhere in the high 20s and in the fourth quartile is negative 14 and around, you know, quartile three and two, it’s right around the average.

So this is all about manager selection, and if you were able to you don’t have to be perfect, right? So if you were to just throw darts and get a manager in each quartile so 25 percent in each quartile, so you would say you have no skill, my team and I have done this work, you would end up with a return that is about 170 basis points over public markets with zero skill, that’s probably the illiquidity premium.


KINNIRY: All asset classes like on the runoff to run treasuries or ETF’s that are the same basket of ETF, the more you know, traded they are, so the ones 1-7 is probably, first off, a liquidity premium, 1-7, if you have no manager skill or be something that you would not want to leave on the table.

But if you even have moderate skill where you would select instead of the 25, 25, 25, 25, but you’re able to select 30 percent out of quartile one and two and 20 percent out of quartile three and four, the returns quickly approach 400 basis points over public markets and then if you have higher skill, again, you know, I’m not saying this is easy but if we are able to select 40 percent of your managers in the top quartile, 30 percent in quartile two, 20 percent in quartile three, and then 10 percent in quartile four, the returns or about 700 basis points over.

HarbourVest’s experiences been in around that range 700 to 800 basis points over public markets,


KINNIRY: Vanguard being conservative, we believe the illiquidity premium will drop, it has averaged in the past about 300 basis points by let’s say at half of that at one-five and close to that no skill, and if HarbourVest can do even half of what they have done in the past and are just able to get slightly better than manager selection, our forward-looking estimate is our investors will get between 300 and 400 basis points or three percent to four percent more than public equity, ad that is going to be very significant in this low return world. You know, I happen to listen just recently to the interview with Jack Brennan and you talked about the 60-40 portfolio.

And I share your concerns and Jack’s concern but where are returns going to come from and so to be able to add three percent or four percent over public equity and fund it from public equity, we think that that is extremely prudent for investors to do.

RITHOLTZ: So no doubt, 400 basis points gets a lot of people’s attention, but there are a lot of other reasons to consider private equity. Let’s talk about correlation, how closely are the returns in private equity correlated to what we see in the public markets?

KINNIRY: Yes, so the correlations, and you would have to look at this twofold, right? Because the correlations, since a lot of private equity doesn’t mark meaning they’re not marked to market, the public markets mark to market every single day. And so…

RITHOLTZ: Every tick.

KINNIRY: If you were to mark to market the assets like if you have and HarbourVest does this and the industry does this too, you can create an algorithm or a beta to try to get what your daily marks would be, and even if you were to do that you would see correlations below what software let’s say you know, 0.8 0.85, but again, you and I Barry, thought a lot about behavioral finance and advisers alpha was built on behavioral finance, the fact that these do not mark and the prices are stale, and one could say that this is a phantom benefit, and I’m not disagreeing.

But if you are only to price the total stock market or the S&P 500 every six months on a lag, I believe investors would do better. Because a lot of times, we’re reacting each and every day to what happened yesterday and does that really matter what our horizon is 20, 30, 40 years so we believe that this will provide diversification and behavioral benefits because of how private equity works.

RITHOLTZ: Right, the advantage of homes or they, you don’t get a price every day and we’re recording this the day after look like the markets were going to be off two percent and on a day when the markets have bounced back one percent, that sort of volatility can easily distract investors from the long-term.

So let’s stick with private equity and long-term. Given how expensive public stocks are and by many measures, we are at the upper range of valuations, private equity multiples have followed along and PE is about as pricey as stocks are more or less so it’s a rough estimate what are the concerns about private equity multiples being as pricey as they are today?

KINNIRY: Yes, I think your set up there, Barry, is correct, public equities are probably in their top 20 percent and private equity have followed but I also think that somewhat misses the point, we do not believe markets have an expiration date, you would’ve said public equity in private equity were overvalued in 2016, they’ve gone on to more than double. We have found that people that market, time markets, really are a lot of people get celebrated for calling the top in 1999 or they get celebrated for calling the top in 2007, but I’m looking at you I’m looking at charts of my S&P 500 at Vanguard and the private equities, if you are the worst market timer ever and you bought in March 2000, the HarbourVest fund for that vintage was up 10 1/2 percent and US equity market over that time horizon is up 3.6.

So let’s say like the ten to 15 year return off of that. Same thing is you know if you bought at the top of ’07 – ’08, you know, investors are I think the conundrum here is what you do, you take money off the table and put it in fixed income instruments that are yielding somewhere below 1 1/2 percent and so market timing has proven to be, you know, probably more investors create more bear market on their own and opportunity costs by using simple metrics like valuations to try to call the top. So we would advise against that.

The second thing I would say, Barry, we also talked about this will be funded from public equity, so if you are 60-40, you are not really increasing the value at risk or the risk budget of the portfolio, you would be moving that 60 down the 42 and putting it in private equity at 18 and so we would do that all day whether it’s high valuation, medium valuation or low valuation.

RITHOLTZ: Makes a lot of sense and you’re locking in a longer-term time horizon for that portion of the portfolio. Have you considered other types of private investments, things like venture capital or hedge funds beyond private equity?

KINNIRY: Yes, so maybe I could walk-through what is in this offer because it actually is a very diversified offer that we have built for investors, you mentioned some of them so this will have diversification of stage, so it will have venture capital within HarbourVest Vanguard offering. The growth equity and venture capital growth equity is a later stage venture, this portfolio will have somewhere around 20 to 25 percent growth equity and venture, it will then, the remainder of that will be in buyouts which are traditional leveraged buyouts, those are more seasoned companies more mature companies so you do get a lot of diversification of stage. You will have geographic diversification within years.

So think of this as the total stock market if you will of private equity, it will be globally diversified, stage diversified, like in the public markets we use growth and value and large, mid, small, this will be geographically diversified , it will have venture capital, it will have buyout, it will have primary investment, secondary investments, and direct coinvest, so it is a real turnkey solution that at the end of the day, it’ll have 600 to 800 operating companies and that would be hard for any investor that’s let’s say, under $2 billion to try to replicate because most of these managers are very specialized inside of HarbourVest, right?

So what makes a great venture capital manager might be different than an Asian buyout manager. And so this will have 30 to 40 general partners inside with 700, 800 operating companies so very hard for any investor under let’s say $2 billion to replicate this offer. So it is very well diversified.

RITHOLTZ: So that number of companies under a variety of managers under a variety of sectors leads me to ask the question, are you going to run into any capacity constraints if you ramp this up? How big can this scale at Vanguard? Can this be $1 trillion line of business?

KINNIRY: Yes, I would say maybe address that two ways, one and maybe we’ll get to that fees of private equity later but let me address that a little bit here. HarbourVest and the general partners that they work with are mostly compensated on performance-based fees, it’s known as carry in the private equity space, and so the economics to them really start to accrue once they hit a hurdle rate above eight percent, the management fee that they get pretty much just covers the operating costs of what they do so they do not want to give away capacity that they do not believe they can source without returns that are double digits and above double digits because that would not be good for their business.

So they watch capacity both that the general partner level and at HarbourVest level, it’s probably one of the things they are you know, obviously since the economics are tied to that, they are going to watch that very closely. So we have a runway with them and we think it’s an intermediate runway, but if we do well here and we are able to democratize – this asset class, I would say very much like we started with one active manager, the Wellington Group, and now we have close to 30 active managers, so we are continuing and will continue to think about do we need manager two and then manager three and we feel we are very well equipped to source a second and third manager when that time comes, but together, HarbourVest and Vanguard are looking at capacity very closely.

RITHOLTZ: So let’s put some flesh on those numbers on those fees I’m assuming when you talk about you know just the cost of administrative expenses on a fund, that’s going to be something, and private equity obviously much more expensive than managing an ETF or an index, I’m going to guess that’s going to be about 50 basis points and then that 8 percent, that’s a pretty good long-term S&P 500 return number, their fees, are their outperformance over that 8 percent, am I getting that more or less right?

KINNIRY: That’s right. The carry does not start to kick in until a return hurdle of eight percent and like most private equity managers are shooting for you know, 15 to 20 to 25 percent gross returns and the best ones have been able to do that and that’s where the economics really lie.

And so I think you get back to aligned interest, right? When most of the fee stack is performance-based and about some hurdle, everyone is operating under the same incentives. And so, you know, that makes private equity a very aligned investment and asset class to client outcomes.

RITHOLTZ: Quite interesting. You mentioned you want to be diversified globally in terms of the investment, I’m assuming that that means everywhere around the world. What about the investors? Is this the same, is this US only or is this going to be open to global investors?

KINNIRY: So today, we’re starting in the US just like were staging this out by client segment and working you know, where we are mostly working with qualified investors in the regulation this year, eventually, we will, you know, try to move this down market to Main Street US investors, and eventually, we are looking at how we could utilize this and some of our non-US offerings whether it be single-fund solutions or whether be in our advice outside of US. But again, no timelines on that, but that is again probably where we will be at some point in the future.

RITHOLTZ: Interesting and you had mentioned you were working with advisors on this, what do you think the process is going to be like before this reaches retail. Is this going to be, you know, a long process? Or do you think you are going to get there sooner rather than later?

KINNIRY: I mean our hope is to get there sooner rather than later, you know, we talked earlier about a 60-40 portfolio, I mean I think the main street investor let’s just take you know a schoolteacher, a nurse you know I was saving diligently for retirement I don’t know where the returns are going to come from, I mean most of the fixed income investments are below inflation, and so you know the sooner we can get private equity into Main Street investors and where we are the allocator of it and we do it in a thoughtful way, I think it will have long-term compounding advantages for these investors are needed the most who were saving diligently, doing the right thing, saving with a long duration and just hoping to get real returns in retirement.

There’s no real reason to see your saving as a deferment of future consumption, and if you’re saving and getting a negative real return, that really is in a trade-off that most people, you know, would welcome. And so we’re trying to, you know, make sure that we can generate real returns for investors saving for retirement so all of our energies and efforts are on this end. I just don’t have the time line.

RITHOLTZ: So let’s stick with retirement. Is this better suited for qualified tax-deferred accounts 401(k)s and IRAs versus traditional portfolios? And how might this fit into a target date fund?

KINNIRY: You know, I would say both set of investors use it well, I know you work with high net worth families, Barry and I do as well, I work a lot of family offices and high net worth taxable clients, and a lot of clients think about after-tax returns. Not to get too technical but this is a good portfolio for tax and wealth and estate planning, it follows the J curve which means it has some early year losses which are valuable to high net worth families, and it’s a great estate planning as you can actually get asset out of your estate at let’s say x and then 15 years later they come out hopefully at 2 to 2 1/2 times x.

So we do see this is a very, very popular private equity strategy in you know, some of our high net worth trust and estate planning clients. On the other end of the spectrum is just Main Street investors who were saving in a target retirement fund. And then for target date funds which would be in a defined contribution plan where Vanguard would, you know, obviously do the multi-asset class portfolio construction and the allocation and the rebalancing, and these are long duration investors, typically they have a 30 year investment horizon and then maybe a 50 to 60 year life horizon.

And the other great thing about the RX (ph) is we know exactly when they’re going to retire and when they are going to shift from accumulation to decumulation of retirement income so we could have a private equity glide path that we mentioned earlier, let’s say you have 15, 20, 25 percent of private equity when you’re 30 years away to retirement and we just stop investing in that as you approach 5 to 10 years prior to retirement so when you start retirement income, private equity lands at zero.

So we see it is a perfect place for both ends of the spectrum and really for all investors who are looking to have real returns.

RITHOLTZ: Quite interesting.

So let’s talk a little bit about investor appetite. How strong is the demand for this sort of investment from the public today?

KINNIRY: The investment demand for private equity both on our launch, but private equity in general has been setting records. You probably read in the press, fundraising in ‘19, ‘20 so far in ‘21 has just been off the charts. One could argue it’s cyclical or others could argue it’s secular. I’m on the secular side of this. You know, we do see that some investors are leading edge of you know, progressiveness and so you see the top endowments and foundations and sovereign wealth funds have been in private equity since the early 1990s, they’ve increased their allocations.

I think this is the rest of the market catching up, Barry, so the demand is quite strong. I do not see it as cyclical. We’ve been through three of the largest bear markets in the market’s history when you look at the Internet tech bubble and in the ’08, ‘09 global financial crisis, and then the quick blip in COVID, and yet you continue to see private equity grow.

So I believe this is structural and I believe it’s because of the investment case both on diversification and what it can do to improve outcomes on performance.

So I do not see this as being cyclical, I would be shocked if five and 10 and 15 years, that private equity is not larger than it is today.

RITHOLTZ: Interesting. So there’s a quote and I think it’s yours that I want to share.

Quote, “Restrictions on who can invest in private equity should be based on investment horizon and not income or wealth” unquote. Discuss.

So I think the current regulatory has a lot of merit, you know, right now, the gates to get in to private equity are wealth and income and I think it does have merit I think the regulators really do care about investors and they care deeply about investors, and they would argue that these investors could afford to lose assets when they have this type of wealth and income threshold.

But I would argue like let’s just say you take someone who is a high spender, someone who is spending eight or 9 percent of their portfolio whether it’s just a high net worth client or an entertainer or a sports figure, even if they have $10 million and are spending a lot of money I would not recommend private equity to that being it is an illiquid asset and so I really think it’s much more appropriate to think about what is the horizon of the investor, is the asset being managed by a fiduciary so we’ll, what — we talked about target retirement funds or advice at Vanguard, we are managing those assets and we would rebalance those assets.

So I think when it is professionally managed and it meets the time horizon and the investor is an accumulation or slight decumulation, that’s where I would put private equity but if someone walked in and they had you know, $15 million and making $1 million a year but they were spending two or three, and you and I, Barry, know clients just like that. They would qualify but I would not put private equity in their portfolio.

So I understand why wealth and income are really around those clients could afford to lose it, but if you take a step back from that I think time horizon whether you’re the accumulation or decumulation and whether it’s professionally managed by a multi-asset class professional would be the real gates of prudence as opposed to just wealth and income.

RITHOLTZ: That makes a lot of sense. The liquidity premium only works if you don’t need to tap into that capital for that entire lockup. But I’m sure there are pretty substantial penalties for getting out of the private equity investment early how do you manage that if someone circumstances change and they need the cash sooner versus their original plans.

KINNIRY: Yes, I think there is a secondary market, Barry, that is growing and getting closer and closer to the fair market value, I would say it like any other asset class, we see including ETFs, if you’re trying to sell out because the market is under pressure a contagion are you should expect a large discount like we saw in 08, 09 and during in COVID, even in high-quality fixed income, you see discount under stress.

However if your circumstances change and you just want to get out of private equity and it’s not in contagion and you want to do it at you know over time like in a quarterly or semiannual a lot — the secondary market does accommodate windows where you can sell your private equity back and the discounts are not that extreme if you’re doing it in the qualify times that the secondary market allows liquidity events.

So I would say it you know it’s twofold if you’re selling because the market contagion are in market stress, expect a large discount like you would in most other asset classes.


KINNIRY: If you’re doing it because of nonmarket related events and you do it in the windows that allow, the discount will still be there, I want to be very clear, no different than trying to sell me the small bonds or corporate bonds but it would not be that detrimental. But it is clear we want investors understand that they are buying a long-term investment and hopefully the circumstances do not change that would warrant them selling it.

RITHOLTZ: So that’s one of the unique challenges of private equity versus, you know, plain-vanilla stocks and bonds, what are other challenges that are unique to this asset class?

KINNIRY: I think the other challenges are manager selection and manager access, most of the top managers are filled, oversubscribed and so for you or I Barry, or even, if you’re on – sit on a committee of an endowment. If you’re going to start private equity today, the list of general partners that you will get access to is probably a very small list and it’s probably maybe not the top quartile list and that gets back to why we went with HarbourVest 38 years of doing this and by being an investor early and consistently, access is granted to those who have been there first and who have been there consistently.

So I think it will be a challenge for someone who is entering private equity today to get top quartile managers unless they are working with someone like Vanguard or someone like a HarbourVest because access will not be there if you try to just, you know, do this on your own.

RITHOLTZ: And if I recall correctly, Vanguard has something like 30 million clients. Is that number about right?

KINNIRY: That is right, you know, that is right, Barry. So you know, a lot of times, people look at our size and AUM, but I would really direct, you know the AUM is you know we are just the professional steward of 30 million investors, it’s their assets, they own the assets, we are managing those assets on the behalf of the investors, 30 million, who have entrusted us to do well for them.

RITHOLTZ: So clearly you have the expertise in terms of custodying assets and reporting and doing the performance reporting as well but private equity seems like a unique set of I don’t want to say nightmares but it’s so complicated given how money is not only placed but drawn down over time and investing in funds as needed as opportunities come along. What were some of the real complications of setting up the back office of private equity when you’re working with Vanguard and HarbourVest.

KINNIRY: Yes, I’m glad you asked that Barry because a lot of times, the focus is on the investment performance and the diversification and the outcomes but you are correct that the client experience and how this works is not as simple as buying an ETF or mutual fund and what, and we spent a lot of time and technology dollars on to make sure that this will not only with the investment experience be world-class but the client experience will be world-class. So we put a lot of time and energy and effort to make sure that the interface and how the capital calls work and how everything now being digital online really helps improve the experience for clients.

So not only do we believe we will have a world-class investment experience but we believe we have a world-class client experience and I think is again why you know, thinking about it more as an advice, part of an advise multi asset class, where we are moving all of the money around whether it’s rebalancing or capital calls. Certainly self-directed ultra high net worth clients who are used to this are used to how this works but I think it is advise capacity whether it’s through our OCIO, our personal advisor services or maybe one day in a TRF, we can alleviate a lot of that mechanical cash flow capital call moving it from public markets to private markets and back.

And I think that will only improve the experience. So clients, they won’t go see one NAV or one return of all their investments rolled up and I and I think the experience will be enhanced from that.

RITHOLTZ: So I have a few questions left before I get to my favorite questions. And let’s stick with Vanguard.

I haven’t heard many of your competitors looking into private equity as a mass asset class for their investors, what is it about Vanguard, what do you bring to the table that makes you so uniquely suited to do this? You seem to be the only large asset manager that’s looking to forget democratizing stocks, you’re looking at democratized private equity?

KINNIRY: Yes, I think that’s an astute observation, Barry.

I think it gets back to our roots in our mission and why Vanguard was founded.

Indexing was around before we started Vanguard and it was an institutional you know, Samsonite and Wells Fargo, so indexing was around active management around, and so Vanguard’s whole purpose and mission was to take you know institutional investment offerings that have served these large asset pools well down to Main Street mom-and-pop investors. So I think that’s probably why you see us trying to democratize or equal access this to investors who need it the most.

And obviously sovereign wealth funds and endowments have been very well served by private equity and they don’t need Vanguard necessarily to do private equity and so our goal and our mission from our founding was to make sure that the little person and the mom-and-pop investor, the Main Street investor was on a level footing with the largest sovereign wealth funds and the largest endowments and foundations so think this plays right in our entire roots and our mission and our history.

RITHOLTZ: So I love this quote of yours on this basic concept. Quote “it took us 35 years to do this on indexing, 20 years to do in an active fund, so maybe 20 years from now private equity and its access to world-class managers for the average investor will look very much like indexing did over the course of 1975 to 1995.”

KINNIRY: Yes, so I think that’s exactly right, that is our hope and that’s our aspiration when I arrived at Vanguard in 1997, it’s hard to believe indexing assets were around 8 percent of mutual fund assets and so it did take quite a while, you may remember, you know, indexing was called un-American.


KINNIRY: The advisor community did not want any part of indexing because the value — this gets back to some of the work we’ve done on advisors alpha, the value proposition of most advisers were higher median outperform, you know, outperform the index through tactical allocation or manager selection and so to see you know the diffusion of indexing over the last 20 years has been amazing and you know, we hope and we think that this would be the right thing to do to try to follow that same template for private equity for Main Street investors.

RITHOLTZ: So let’s use that template and look forward 10 or 20 years from now when you’re looking at the ensuing 2020 to 2040 period. What would be your measure of success for this project, what metrics are you can look at to be able to make the determination hey this was every bit as successful as indexing and active management was in the earlier iterations of Vanguard?

KINNIRY: Yes, so I mentioned a couple of times growth and cash flow never been Vanguard’s mission, we believe the growth and cash flow is an outcome of serving investors well and serving them prudently.

So my success metrics would be that the performance comes through somewhere like we indicated 300 to 400 basis points over, it’s provided diversification and that investors who need private equity the most and I would say that those are those were saving for retirement, those who do not have access to it now have access to it.

And if those things — three things hold, good performance, diversification, good client experience and access is granted, we would — we would expect our share of the private equity market are to look quite large.

But again the goal is not have Vanguard be a leader in private equity or to build assets or to take on growth, we think there will be an outcome of serving investors very, very well and investors typically vote with their feet and as we have seen, it’s a smart population and we think it’s an outcome of being served very well.

RITHOLTZ: Quite interesting. I know I only have you for a limited amount of time so let’s jump to our favorite questions that we ask all of our guests starting with tell us what you’ve been streaming during this period of work from home. What are you watching on Netflix or Amazon Prime or what podcasts are keeping you entertained?

KINNIRY: Yes, so I kind of new early on, my brother is in internal medicine and runs the ICU here at Penn, and so I kind of knew early on that this might play out longer, this stay from home than most and so I decided to revisit some of the all-time classic or at least in my opinion the all-time classic TV series for a second and in some instances a third, but these are big time commitment. So things like “Breaking Bad”, are “The Americans” and “Homeland” I have re-watched and I’ve enjoyed every second so I went back to the at least what I would call as some of the classics. But it is a big time commitment and I thought I would have the time to do that and I’m glad I did that.

RITHOLTZ: Quite interesting. Tell us about your early mentors, who helped shape your career?

KINNIRY: Yes, I would kind of break it into three stages of my career, Barry, first and foremost, are my parents and my grandparents, my grandparents were very involved and my parents were very, very selfless, they gave me unconditional love and support and just were amazing role models and I think that was the foundation of all my good luck that followed from that. And if I move from parent they my first experience outside of business school I was hired by Harold Katz in the Katz Family office which was run by Terry Gabrielle, Chief Investment Officer.

Now this guys was a CFA from like the 70s and you know told me right away three years get CFA so I got a CFA at a very young age that he taught me everything I, you know, just sat at his hip then had a world-class experience on how to value companies, forensic accounting, and to be able to like just rip through a company and figure out what it was worth, so both Harold Katz and Terry Gabrielle I think where the early part of my career.

And if those two things aren’t lucky enough, at 32 I ended up at Vanguard and you just had such a luck to be able to work with Jack Bogle closely, you know, Jack Brennan and I worked on many things together, we’re still in contact with him on a pretty regular basis and then Tim Buckley who is our current CEO, I’ve work with him, you know, pretty much since I landed at Vanguard.

I couldn’t find three more better mentors if I tried than the three of them so I’ve just been very blessed.

RITHOLTZ: You know, that’s quite a murderers row of people to help guide your career.

Let’s talk about books. Tell us some of your favorites and what are you reading right now?

KINNIRY: So some of my favorites and slide back to my – what I’m streaming, I’ve read you know, probably a dozen times I would be two by Taleb, “Fooled by Randomness” was probably my favorite and the other is “Antifragile” highly recommended for those who have not read them.

Then Michael Lewis’ “The Undoing Project” it’s really about the special relationship between Kahneman and Tversky and all they’ve been able to accomplish around human behavior and I will stick with you know Kahneman and Tversky, their book “Judgment Under Uncertainty” is still one of the classics of all time.

And so I have currently mostly what I read, you know, it’s just so much to stay on top of the investment news and the news commentary I’m very grateful for you, Barry, you do an aggregation each night, I look forward to getting your email and know there’s so much news out there, so I would say on a daily basis I’m using some of the key aggregators, always use years as first and foremost. So the daily news stream is a lot and I save the books for when I’m, you know, have some downtime, on summer vacation or over the holidays.

RITHOLTZ: Really interesting and thank you for those kudos.

What sort of advice would you give to a recent college grad who is interested in a career in either investment management or private equity?

KINNIRY: I would tell them to go for it, I see so many opportunities on the horizon in investment banking and private equity or what, you know, what you do there as a wealth advisor. I see all three being win-win-win career opportunities, you know, it’s a win first and foremost for the clients that you serve and I think that makes, you know, you feel really good about what you’re doing everyday that you’re actually putting your clients first.

But also personally, it is a profession that if you do it well, the rewards would come to you and your family and that’s always a good thing.

And then lastly, it’s a continuous learning, right? The market are always changing, you’re — the headlines change daily and weekly so what I’m learning in today is so much different than I did last year and the year before that.

So to me these are not zero-sum game activities but these are positive sum game activities, so I would highly recommend anyone thinking about going into the investment or wealth planning world.

RITHOLTZ: And our final question, what you know about the world of investing today you wish you knew 25 or so years ago when you were first getting started in the 90s long before you ended up at Vanguard.

KINNIRY: Yes, I wish I knew today and had a better way to track opportunity cost and what I mean by that Barry is we often only judge what we did, we don’t judge what we could have done, and we mentioned this a couple of times, I think more bear market have been created by investors’ own OEs on what the future will look like than actual bear markets themselves and if we actually kept score personally or individually of what we did versus what we should have done, I think the gap is going to really surprise people.

Also the opportunity of comfort, we’re talking about where bonds are today under 2 percent no one wants to lose 40 percent in COVID or 55 percent in GFC but if you have a 30 year horizon, did it matter over that one or two years, so we pay a huge opportunity cost for comfort.

If you have a 30 year horizon or 20 year horizon I just would ask everyone to examine the opportunity cost they are creating for themselves for such comfort, you know,? The equity risk premium has been about 500 basis points over bonds, probably likely to hold if not be above that, we talked about private equity being three to four over that so maybe eight to ten over bonds.

And so yes, we are risk-averse creatures, we hate loss and I think that’s natural to hate loss and all the loss aversion, but just do it with eyes wide open on what the opportunity cost you are creating for the comfort of short-term volatility.

RITHOLTZ: Makes sense. Fran, this has really been very fascinating. Thank you for being so generous with your time.

We have been speaking with Fran Kinnery. He is Vanguard’s global head of private investments.

If you enjoy this conversation, well be sure and check out any of our previous 350 something prior discussions, you can find those wherever you feed your podcast fix, iTunes, Spotify, Acast wherever. W love your comments, feedback, and suggestions write to us at

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I would be remiss if I did not thank the wonderful team that helps put these conversations together each week. Maruful (ph) is my audio engineer, Paris Walt (ph) is my producer. This week, my Project Tracy Walsh, Michael Batnick is my head of research, I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.




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