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Private-Equity ETFs Offer High Yields


Private-equity funds are already hitting their maximum asset caps, leaving many would-be investors out of luck. Alternatively, investors can take a look at the two private equity-related exchange traded funds instead.

For private equity exposure, investors can consider the PowerShares Global Listed Private Equity Portfolio (PSP) and ProShares Global listed Private Equity ETF (PEX) .

PSP tracks the Red Rocks Global Listed Private Equity Index, which is comprised of 40 to 75 private equity companies, including business development companies, master limited partnerships and other vehicles that invest in, lend capital to or provide services to privately held companies. [Mitt Romney ETF Looks for More Upside]

PEX tries to reflect the performance of the LPX Listed Direct Private Equity Index, which consists of 30 private equity companies. The component holdings will have a majority of its assets invested in or exposed to private companies. The fund holds common stocks issued by U.S. and foreign companies, including business development companies for U.S. domiciled companies.

Private-equity firms are known for raising cash and borrowing money to acquire a company in an attempt to turn around and re-sell them later for a handsome profit. BDCs lend capital or provide services to privately-held companies or thinly-traded U.S. public companies. Since BDCs have exposure to smaller companies, the companies will be susceptible to potential risks involving bankruptcies or defaults.

Private-equity firms are now filling their coffers faster than ever as pension funds, endowments and wealthy individuals want to invest, reports Dawn Lim for the Wall Street Journal.

According to Preqin, the proportion of private-equity funds that reached or exceed the maximum amount set out to raise this year is at its highest since at least 2009. Private-equity firms set a limit on assets raised, or also known as a hard cap, at the beginning of a fundraising process and cannot be exceeded without approval from investors.

About 55% of 280 funds Preqin monitors had reached their hard-cap or surpassed that maximum size as of November 13, compared to 43% of funds last year.

“The number of quick fund closings has been especially pronounced this year,” Cathy Konicki, a partner at NEPC LLC, said in the article.

Many investors are attracted to private-equity firms because of their cash generating potential. According to Preqin, private-equity firms returned $444 billion to investors in the first half of the year. In the 10-years ended June 30, private-equity funds generated net annualized returns of 14.26%.

PSP shows a trailing 12-month yield of 7.95% and PEX has a 11.29% 12-month yield. PEX is a little over an year old, but PSP has an average annualized 5-year return of 10.9%, not including yields.

PowerShares Global Listed Private Equity Portfolio


For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.