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Private Equity Funds Won’t Turn Investors Into Mr. Wonderful

Will Healy

Private equity has long served as a vehicle for outsized returns for the wealthiest investors. These investments do not trade directly on the stock market. They involve private investments in companies with limited transparency to outsiders. They can often involve pre-IPO investments or buyouts that remove companies from a public exchange.

Most of us see this investment world through the television show Shark Tank. Unfortunately, securities laws prevent the majority of the population from investing like Mr. Wonderful.

Such deals are usually limited to “accredited investors.” These investors have a net worth of at least $1 million and income of at least $200,000 per year for the last two years ($300,000 per year if married).

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For interested investors who fall below this threshold, one loophole exists. These investors can find mutual funds and ETFs in companies who make private equity investments. However, few of these vehicles exist.

Also, much like Mr. Wonderful would, investors must evaluate whether the investment will profit them. So are these private equity funds worth it? Let’s take a look. Below are two of the more popular private equity-oriented funds for the “ordinary folk” and how they compare.

ALPS | Red Rocks Listed Private Equity Fund (LPEFX)

The ALPS | Red Rocks Listed Private Equity Fund (MUTF:LPEFX) fund invests over 50% of its funds in the United States and just over 44% across Europe. Very little of its funds go to emerging markets.

Still, few of these non-American private equity funds trade on American exchanges. So, to get exposure to the private equity activity in Europe, LPEFX exists as one of the few ways for U.S.-based equity investors to profit from this opportunity.

Of its top 10 funds, only two come from the United States. The managers invest 5.33% of the fund in Germany-based Aurelius Equity Opportunites Fund. HarbourVest Global Private Equity Ltd (OTCMKTS:HVPQF) makes up 4.67% of the fund’s assets.

Of the U.S. investments, its third largest holding is a 4.36% stake in IAC/InterActiveCorp (NASDAQ:IAC). LPEFX also invests 3.65% into Blackstone Group LP (NYSE:BX).

Still, this investment comes at a cost. The fund’s expense ratio stands at 1.99%. However, that fee does not mitigate the high level of risk. The risk turned against the fund as it suffered severely during the 2008 financial crisis. The effects linger so much that the 10-year average return falls to 3.4%.

Its returns since the financial crisis paint a more positive picture. The fund saw a 12.1% return over the last year and a 10.4% average return over the last five years.

PowerShares Listed Private Eq. (PSP)

The PowerShares Listed Private Eq. (ETF) (NYSEARCA:PSP) invests about 65% of its funds in late-stage private equity, with the remainder going to mid-stage and early-stage investments. The fund also caps its stakes in specific equities at 10% and rebalances quarterly.

Japan-based SoftBank Group Corp (OTCMKTS:SFTBF) stands as the fund’s largest holding. SoftBank is best-known for stakes in Alibaba Group Holding Ltd (NYSE:BABA), Sprint Corp (NYSE:S) and dozens of early-stage tech investments. UK-based 3i Ord and IAC are among its other investments.


However, even with diversification, this private equity vehicle also remains risky. The net expense ratio stands at a very high 2.31%. Unfortunately, the returns do not compensate for the high fees or the risks.

PSP boasts an 11.93% return over the last year and 9.46% over the last five years. However, its equity positions took a massive hit during the financial crisis. Hence, its average return over the previous ten years falls to 1.64%, a level below its expense ratio.

Both Funds Compare Poorly to the S&P 500

The S&P 500 outperforms both of these funds. The most popular tracker, SPDR S&P 500 ETF Trust (NYSEARCA:SPY), offers higher returns with a much lower level of risk.

For SPY, one-year returns come in at just under 15%. Over five years, it returned an average of just over 12.5% per year. Its 10-year return averaged almost 9% per year. Again, that also factors in the financial collapse in 2008. Further, for these returns, the fund charges a low expense ratio, only 0.09%.

Bottom Line on Private Equity Funds

Private equity funds can allow the masses higher-level investing. Still, the average return indicates these vehicles will not lead investors to outsized profits. I see little reason to pay high expense ratios for a fund that will likely sustain massive losses if we see a repeat of 2008.

For those who are intent on this high-level investing, they need to put in the work to climb to a high-income level professionally. Otherwise, they should just invest in the market.

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As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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