The firm, which oversees trillions of dollars of investments, many in index funds, is considering the very different field of private equity investments, a report says.

Renowned “passive” investments house Vanguard, with $5.6 trillion in client assets, is reportedly weighing the idea of pushing into the private equity space, showing that even an index-tracking behemoth is feeling the lure of alternative assets.

The Wall Street Journal reports that the US firm has held talks with a “handful of private equity firms”, such as Boston-based HarbourVest Parners, UK-based Pantheon and “at least one other firm”. The WSJ quoted unnamed sources. It did not mention other categories of alternative investments such as hedge funds, private credit or real estate.

With more than $1.0 trillion of uncommitted capital – aka “dry powder” – in private equity alone, some figures have speculated whether the field has already gotten crowded. The sector has drawn in money from investors frustrated about low yields on conventional listed assets at a time of low or even negative interest rates. Private equity investors, for example, typically expect to earn a premium for the lower liquidity that comes with holding investments for periods of five years or more.

But while there have been warnings that private equity is not without risks, these aren’t enough it seems to put off fresh investors. The WSJ said that Vanguard has told private equity executives that it is considering offering private-market strategies to clients of its advisory services. Its focus would likely be on institutions and the firm's high net worth clients which it advises. The report also said the move shows how Tim Buckley, who became CEO last year, is driving change at the firm.

Vanguard was created by John Bogle, the “father of indexing” who died earlier this year at the age of 89. For many years the firm has been associated with the index-tracking form of investment that has flourished over recent years as stocks, propelled by central bank new money, have risen. Regulations and other forces have also put actively managed funds’ fees under pressure, benefiting firms such as Vanguard.

However, with markets becoming more volatile in recent years, and returns from some traditional asset classes hit by yield compression, private capital markets have come into vogue. They are typically more associated with high and ultra-high net worth investors and institutions able to get a seat at the table. 

Another recent development has been that of tech-driven wealth platforms offering to “tokenize” alternative investments using blockchain technology so that investors can enter the space for lower minimums than has traditionally been the case. Firms in this area include Palo Alto, CA-based Swarm and Switzerland-based Smart Valor. 

(Editor’s note: While clearly the story is written in a circumspect way – these appear to be preliminary discussions – the fact that an index-tracking powerhouse such as Vanguard is looking at private equity shows how far this asset class has come. It might also raise some red flags. A few days ago, Switzerland’s Pictet told this publication and other media that it is wary of private equity, which it sees as a highly cyclical asset class. It may be that the area is already getting too hot already. In any event, the likely scale of exposure by Vanguard will be small in proportion to its overall total AuM size.)