By Matt Wirz and Anne Tergesen

Vanguard Group grew into a $10 trillion financial colossus by pioneering simple, ultralow-cost investing. Its wildly popular index funds proved that people don't need expensive portfolio managers to pick their investments.

These days, the company's most exciting new product is a striking departure from that playbook -- a foray into the world of private markets, where investors pay steep fees for access to complex deals that promise high returns.

Wall Street is feverishly embracing private markets and Vanguard, like other giant money managers, wants a foothold in this booming business. A new fund it is developing with Blackstone and Wellington Management will offer a mix of public and private assets.

State Street, another big fund manager, joined with Blackstone rival Apollo Global Management to create a 401(k) target-date fund with approximately 10% exposure to private markets. BlackRock is aiming to launch something similar next year.

The companies say they want to democratize investing, letting people place bets in areas like private equity and private credit that have long been restricted to pensions, endowments and plugged-in elites. With fewer publicly traded companies to invest in, people need to put money in private markets, they say.

But the investment firms have something to gain for themselves in this shift. After years of driving down fees, retail fund managers are nearing a wall as what they charge approaches zero. The chance to sell more funds that can charge higher fees would boost revenues for the likes of Vanguard and State Street, which pioneered exchange-traded funds.

"They have been preaching low fees and competition, and now they've come around to the value of alternative investments in client portfolios," said Morgan Stanley analyst Michael Cyprys.

The companies that create and manage the private funds -- Blackstone, Apollo, KKR and others -- are hitting their own wall as their private-equity funds, which own unlisted companies, stall. They have focused on private credit, which involves issuing loans to those same sorts of companies, to generate growth. The trillions in savings held by retail fund managers looks like enticing fuel for their businesses.

"Everyone's looking at Vanguard and saying 'wow, they have a tremendous pile of gold, I wonder if they'd let us have a small slice'," said Bob Brinker, publisher of a mutual-fund newsletter.

Momentum is building in Washington for changes to make it easier for individual investors to buy into private funds. President Trump's staff is drafting an executive order that would instruct the Labor Department and Securities and Exchange Commission to provide guidance easing the inclusion of private investments in 401(k) plans, people involved in the process said.

'Can you get out?'

Some savers and their financial advisers are skeptical of the new private-markets offerings.

John Heldman, a 67-year-old financial adviser in Newport Beach, Calif., says none of his clients -- some worth over $100 million -- have expressed interest. Private funds offer the prospect of higher returns over time, but they can tie up savings for as long as 10 years, with much less "liquidity," or flexibility for investors to sell when they need cash.

"You can get in but can you get out?" said Heldman. He said the higher fees and lack of daily pricing are also downsides.

Leyla Kunimoto started investing some of her savings in real-estate private-equity funds in 2020, and now two of her purchases are missing targeted returns. "I wish I could push a button today and take a loss," she said. "Instead I'm stuck for the next six or seven years."

The 43-year-old from Seattle is back to buying public index funds, has cut her private allocation to 10% from 12% and is still paring back. She now writes a newsletter about the pitfalls of private investing.

Creators of the new private-markets products say they offer some flexibility for investors to exit because they mix private funds with public ones.

Private-equity and private-credit investment firms have raised vast sums of money from funds sold directly to individual investors and are expected to bring inasmuch as $1.5 trillion more by 2033, according to consulting firm McKinsey.

Public-fund managers see that momentum and don't want to miss out. Under the partnerships they are forming, they would get a share of the premium fees that the new funds will charge.

Mutual-fund manager Capital Group in April launched a fund with KKR that mixes public and private debt. The fund, which restricts withdrawals, charges gross fees around 1.57%, compared with 0.62% for Capital's largest bond fund. Franklin Templeton, which has snapped up several private-fund managers in recent years, sells a private-markets fund charging a 1.25% management fee and 12.5% on all profits after the fund returns 5%.

Several firms are also pushing private-investment options into the $12.2 trillion 401(k) market, including through target-date funds. Those funds receive more than 60 cents of every dollar of retirement savings that flows into 401(k) accounts.

In this realm, too, investor access to private assets will come at a premium. A recently launched target-date fund from Great Gray Trust, which blends private investments from firms including BlackRock alongside stocks and bonds, charges an average of 0.38% of assets. BlackRock's LifePath index target-date fund, in contrast, charges about 0.09%.

Vanguard and State Street's new initiatives are small within their overall businesses. Both firms say they are investing in customer education to explain the risks involved.

'Project field goal'

Low fees are a religion at Vanguard's Malvern, Pa., headquarters and a key attraction for faithful customers, who call themselves "Bogleheads" after company founder Jack Bogle. In a recent TV commercial, Vanguard announced its biggest fee cut ever and touted how it is "taking a stand for investors."

Last autumn, a few months before the cut, Vanguard President Greg Davis got a proposal from Wellington Chief Executive Jean Hynes. She wanted him to participate in a new fund that would include public investments from their two firms and private assets from Blackstone, the Park Avenue-based powerhouse of bespoke investing. The deal was sealed after five weeks of three-way talks that the firms dubbed "project field goal."

"The value proposition for Vanguard is, number one, our funds continue to get distributed in the ecosystem," Davis said in an interview. And even in the private funds it offers, the company is "very, very, very conscious that fees matter," he said.

State Street is adopting private markets even more aggressively. "The number of public companies to invest in has come down significantly, and you've had this enormous growth of private credit," said State Street Chief Executive Officer Yie-Hsin Hung.

There are now 4,300 publicly listed U.S. companies, compared with 7,300 in 1996, according to investment firm EQT.

Other big asset managers, such as Fidelity, are hiring fund managers to build private investment teams internally.

'Wildest dreams'

The only way workers will get private-investment options in their 401(k) plans is if their employers choose to offer them. Consultants and attorneys say most large employers are reluctant to adopt higher-fee products in their plans for fear of being sued by plan members for mismanagement.

Creative Planning, a firm that handles more than $350 billion for individuals and 401(k) plan clients, began offering private investments last year in 401(k) managed accounts offered by 150 mostly smaller employers. The portfolios typically invest about 5% to 15% of employees' money in private investments.

Walbridge, a family-owned construction firm in Detroit with 2,000 employees, is considering moving its 401(k) plan to Creative Planning this summer to further diversify the plan's investments, company President John Rakolta III said.

"Someone who wouldn't in their wildest dreams qualify to invest in these funds can do so now that they're in the 401(k) space," said Jamie Battmer, Creative Planning's chief investment officer.

Write to Matt Wirz at matthieu.wirz@wsj.com and Anne Tergesen at anne.tergesen@wsj.com

(END) Dow Jones Newswires

July 02, 2025 05:30 ET (09:30 GMT)

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