Acquired
02:53:44 · David Rosenthal, Ben Gilbert
[02:53:44] S1: Right. So, yeah, what does Saleem do when he comes in? [02:53:48] S0: Well, I think it's some of these things we've been talking expand the advisory business. In addition to that, expand fixed income, which we haven't talked about in a while. Try and expand into retirement, where, obviously, Fidelity has really knocked it out of the park. He's talked on podcasts about making deeper technology investments and improving the client experience. There is this interesting question, which is that they haven't really had any new innovations in a while, call it a decade, that have been really meaningful to the business and that they've continued to scale. They did buy a direct indexing platform called JustInvest, but afterwards haven't done that much with it. Similarly, the personal adviser services grew really fast at launch and then the in the years afterwards. But since COVID, I don't think [02:54:33] S1: They have been mostly flat. [02:54:35] S0: Yeah. Or at least they haven't been putting out any press releases talking about how big it is getting. One interesting one that I was surprised to see is an expansion into private equity. [02:54:45] S1: Yeah. Yeah. That was surprising.
02:54:45 · David Rosenthal, Ben Gilbert
[02:54:45] S1: Yeah. Yeah. That was surprising. [02:54:48] S0: So kinda before talking about why they're doing it, it is worth calling out this crazy thing, which is for public equities and for bond funds, prices have seen massive compression thanks to Vanguard, where you're seeing they used to charge one and a half, two percent fifty, sixty years ago, and now you are seeing the Vanguard effect. You know? Seven basis points at Vanguard and 40 basis points for the rest of the industry. Venture and private equity is two and twenty or often even higher. I've seen Right. Plenty of higher fee structures than that also. [02:55:23] S1: Right. Not only is it 2% assets under management fee to the fund manager every year, There's also a performance fee on top of that in Right. [02:55:32] S0: In the form of carry. So, David, you and I are in this world. We've been venture investors in the past. We do venture investing now. What is your take on structurally why the Vanguard effect has not come to venture capital and private equity? [02:55:46] S1: Yes. I used to think about this a lot, and now I think the answer is just quite simple. Venture capital and private equity is an access business. Yeah. And it's not like you can just call up your broker and say, hey. I want some shares of Anthropic today and execute an order. Like, you need to pay for access, and that's what venture capital is doing, and that's what private equity is doing.
02:55:46 · David Rosenthal, Ben Gilbert
[02:55:46] S1: Yes. I used to think about this a lot, and now I think the answer is just quite simple. Venture capital and private equity is an access business. Yeah. And it's not like you can just call up your broker and say, hey. I want some shares of Anthropic today and execute an order. Like, you need to pay for access, and that's what venture capital is doing, and that's what private equity is doing. [02:56:08] S0: In private markets, the assets have to pick you back. Yes. But in the public markets, they do not. Yes. And in venture capital, there is this chance of extreme outperformance in a power law way for the very best funds, and investors actually are willing to tolerate fees for that chance at outperformance. Yep. The other thing is you really do need a crazy person like Jack Bogle that is interested enough in capitalism to spend their life in the world of investing, but not capitalist enough to want to benefit from it in any way, which is like this incredibly rare, rare person. And Jack didn't exist in this world at all. I mean, he only was in the world of mutual funds and basically had no contact with the sort of venture and and private equity worlds. [02:56:53] S1: Yeah. There hasn't been a Jack Bogle in the private asset world of VC and private equity, and there hasn't been another Jack Bogle in the public asset world either. He is one of one.
02:56:53 · David Rosenthal, Ben Gilbert
[02:56:53] S1: Yeah. There hasn't been a Jack Bogle in the private asset world of VC and private equity, and there hasn't been another Jack Bogle in the public asset world either. He is one of one. [02:57:03] S0: There hasn't been another Jack Bogle in any industry. I mean, that's the interesting thing to call out here is to spoil one of my giant endnotes of this episode, my quintessence. There's no reason why mutual ownership of a corporation needs to be strictly in the asset management business. I mean Yeah. Why if this is a better form of capitalism, which I think, like, I'm excited about this model. I'm I'm fascinated by it. It seems like this, like, really beautiful, elegant structure that provides a lot of durability. Why aren't we seeing it in retail and grocery and technology? And why aren't the customers always the owners of the company? Or at least why isn't there literally any other examples other than REI? REI. An Algorand. But that's probably the biggest example. And then a handful of small grocery stores, and the other scale players are probably just insurance companies or banks. [02:58:00] S1: Yeah. Yeah. [02:58:00] S0: But, like, why why isn't the economy littered with this? [02:58:03] S1: Let's table this question for analysis. But to keep it on Saleem and Vanguard today Yes. They're entering private assets for the first time.
02:58:03 · David Rosenthal, Ben Gilbert
[02:58:03] S1: Let's table this question for analysis. But to keep it on Saleem and Vanguard today Yes. They're entering private assets for the first time. [02:58:09] S0: They are entering private assets. And the big thing is these companies are staying private longer, and so so much more of the innovation engine of the American economy is happening in private markets. And so if you're gonna best serve investors, then you you do wanna find some way to get exposure to it. And the question is, can they do it in a Vanguard y way where they they do it at at cost or as close to at cost as possible? And we've seen an announcement of an alliance with Blackstone, the huge private equity firm, which will be really interesting. And I think the question is what's the economics there and at what scale can they do it? Because at least historically, the private markets were a lot smaller than the public markets. Now with multiple trillion or near trillion dollar companies in the late stage private markets. They're pretty big now. [02:59:02] S1: Yep. Yep. Yeah. This needs to get figured out one way or another. Navigating the fee question is gonna be a big one because, again, like we said, this is a fundamentally different market where the asset needs to pick the investor and access is limited and scarce. So, like, the best investors in private markets think, like, Sequoia, Benchmark, etcetera, and the venture world at least. Like, why would they ever give up their fees?
02:59:02 · David Rosenthal, Ben Gilbert
[02:59:02] S1: Yep. Yep. Yeah. This needs to get figured out one way or another. Navigating the fee question is gonna be a big one because, again, like we said, this is a fundamentally different market where the asset needs to pick the investor and access is limited and scarce. So, like, the best investors in private markets think, like, Sequoia, Benchmark, etcetera, and the venture world at least. Like, why would they ever give up their fees? [02:59:27] S0: Right. Right. The other thing that's happened is the success of the index fund has sort of created a barbell in a lot of people's portfolio where you kinda own Vanguard as your, like, 80%, your your cheap beta for most of your net worth. And then you kinda, like, play with the other 20% and look for asymmetric bets to make. Does Vanguard wanna play in that 20% at all? Are they satisfied kind of being the the core for most people? That'll be the interesting thing to watch. [02:59:58] S1: Yep. And it seems like Saleem is moving them in the direction of, like, yes, private assets, crypto, etcetera. [03:00:04] S0: Yeah. My big question is when you are owned by your current set of customers, why grow? You don't have any shareholders to appease. Like, normally in a company, when I buy a share of Apple, it's because I think Apple is gonna compound their profits, their cash flows in the future at a higher rate than anything else that I could invest in. And so it's their job to grow to benefit me as the shareholder. Vanguard doesn't have that. Their their only charter is appease the needs of their current customers.