Morningstar - Q2 2022 - 33

EXHIBIT 5
EXHIBIT 6
Disruptive Appeal Private-market segments look innovative and future-focused,
especially compared with public-market sectors.
Select PitchBook Company Verticals
Artificial Intelligence & Machine Learning
B2B Payments
Big Data
CleanTech
Cloud Tech & DevOps
Cryptocurrency/Blockchain
E-Commerce
FinTech
Industrials
Internet of Things
Life Sciences
Mobile
Source: PitchBook, Morningstar.
Morningstar Global Equity Sectors
Basic Materials
Communication Services
Consumer Cyclical
Consumer Defensive
Energy
Financial Services
Healthcare
Industrials
Real Estate
Technology
Utilities
-
2006-
2008
Vintage Year Cohort
2009-
2011
*As of 09/30/2021.
Source: PitchBook.
2012-
2014
2015-
2017
2018-
2021*
Lack of Fee Pressure In contrast to the
falling costs of the fund industry,
private-fund fees are high and rising.
Breakdown of Management Fee Percentages
Charged by Private Capital Funds
Below 2% 2%
Above 2%
100%
75
50
25
Not just T. Rowe Price but a range of traditional
asset managers have heeded the siren
song of private markets. A Morningstar report
called Unicorn Hunting tracks mutual funds'
exposure to private, mostly VC-backed companies.3
Fidelity Contrafund FCNTX, to take one
example, owns stakes in SpaceX, Rad Power
Bikes, and Stripe.
Many saw Vanguard's 2020 foray into private
equity products as a marker of their mainstreaming.
A Vanguard paper expressed a goal of
broadening access to a " distinct and growing
segment of world equity markets that, because
of its significant illiquidity and other market
dynamics, offers suitable investors the opportunity
to earn long-term excess returns while
increasing portfolio diversification. " 4
The fund is
limited to institutional investors, however.
High Fees
On the heels of the Vanguard launch, the U.S.
Department of Labor opened up the 401(k) market
to the asset class. But slow takeup prompted
Jason Kephart and Erol Alitovski of Morningstar
Manager Research to title an article: " Private
Equity and Target-Date Funds: An Unrequited Love
Story. " 5
They cite high fees as the main barrier.
Indeed, private-focused funds have escaped
the kind of fee pressure that has squeezed
traditional asset managers. In an era of zeroexpense-ratio
mutual funds, management
fees charged by private equity, venture capital, and
other private-market-focused funds have
actually crept higher, according to PitchBook data
( EXHIBIT 6 ). A third of private funds with
vintage years 2018 to 2021 carried management
fees of 2% or more.
Blackstone and the other constituents of
Morningstar's listed private equity index benefit
from these high fees. Competition, scrutiny,
regulation, or other forces may eventually bring
them down. Yet private-market exposure
is hard to replicate in the same way as stocks and
3 Reichart, K.R. 2018. " Unicorn Hunting: Large-Cap Funds That Dabble in Private Companies. " Morningstar.com, June 4.
4 Kinniry, F., Dinucci, T., Green, A., & Foo, L. 2021. " The Case for Private Equity at Vanguard. " White paper. February.
5 Kephart, J. & Alitovski, E. 2021. " Private Equity and Target-Date Funds: An Unrequited Love Story. " Morningstar.com. July 30.
morningstar.com/products/magazine
33
bonds. There's no investable beta to serve
as a passive alternative and exert fee pressure.
For some investors, listed private equity represents
an access route to private markets. Its benefits
are low minimums and ease of trading and
tracking. Its drawbacks are indirectness, volatility,
and correlation with public markets.
Change Is Coming
Former SEC Chair Jay Clayton said, " I continue
to worry that retail investors do not have access
to as broad a slice of our capital markets as
I would like them to have. " On this logic, regulators
across the globe are loosening restrictions,
giving rise to platforms facilitating retail
investments in private companies. Democratization
is needed. As investors of all types-from the
world's largest asset owners to individuals-seek
to gain access to private assets, development in
this area is sure to continue. K
Dan Lefkovitz is a strategist, Morningstar Indexes.

https://www.morningstar.com/funds/xnas/fcntx/quote https://www.morningstar.com/authors/601/dan-lefkovitz https://www.morningstar.com/articles/867995/unicorn-hunting-large-cap-funds-that-dabble-in-private-companies http://www.Morningstar.com https://www.morningstar.com/articles/1050376/private-equity-and-target-date-funds-an-unrequited-love-story http://www.Morningstar.com http://www.morningstar.com/products/magazine

Morningstar - Q2 2022

Table of Contents for the Digital Edition of Morningstar - Q2 2022