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Time for Private Equity ETFs? - ETF News And Commentary

Zacks Equity Research

Activities by the private equity (PE) firms are on a tear and are showing no signs of abating anytime soon. The segment registered an astounding turnaround last year from the 2008 slump on the back of easy money inflows and ended 2014 with the highest investment globally (worth $332 billion) since 2007, per 2015 Preqin Global Private Equity & Venture Capital Report.

Private equity is a way of catering to the capital of high net worth entities. This group acquires rights in high-potential companies lacking cash strength. Along with providing finances, these private-equity firms provide the know-how to run those acquired businesses.

As per Bain & Company, “global financial capital increased 53% from 2000 to 2010, reaching some $600 trillion, and Bain’s Macro Trends Group projects that it will swell by half again, to approximately $900 trillion by year-end 2020.” This abundance of liquidity led to the buyout boom by the PE firms. North America makes up the major chunk of the total private equity assets (57%) trailed by Europe (24%), Asia (13%) and the rest of the world (6%), as per Preqin report.

According to the Private Equity Growth Capital Council, private equity investment volume in the U.S. was sturdy in the first quarter of 2015 regardless of a cyclical downturn. Investments accounted for $116 billion in Q1 of 2015, the second highest first-quarter figures in the last six years. If this was not enough, cash reserves on hand or ‘dry powder’ grew 8% sequentially to $466 billion in Q1 of 2015.

Investors should note that these PE firms offer investors the scope for diversification, not only from a geographic standpoint, but from an investment perspective as well. This is because these firms engage in several strategies—buyouts, growth, etc. — through styles such as acquiring equity stakes or debt positions that are not always accessible to the retail investors.

Stable Return & High Payout

Per the source, over a 10-year timeframe, gains from private equity funds (net of fees) beat the S&P 500 (including dividends) by 5.9%. This asset class is relatively less volatile in nature as compared to public enterprises, as per the private equity council. Private equity also has a low correlation to the broader market but might underperform severely in the global meltdown (read: 3 Niche ETFs That Will Keep Flying).

Moreover, investors should note that this asset class is high dividend in nature. With the Fed preparing for a monetary policy tightening process sometime this year and yields on the benchmark 10-year treasury notes rising by leaps and bounds from June, investors might want to consider making a play on high-yield ETFs.

Notably, as of June 3, 2015, yields on the benchmark 10-year treasury notes were 2.38%. So, what could a better choice than a private equity to see steady return and enjoy yield over 4%. The private equity space is usually available to ultra-wealthy institutional investors but retail investors can play this space via ETFs. Below we highlight two PE ETFs that may entice investors going forward (read: 5 Red Hot Dividend ETFs Yielding 5% or More).

PowerShares Global Listed Private Equity ETF (PSP)

This fund provides exposure to the 62 global publicly listed private equity companies, including business development companies and other financial institutions or vehicles with the principal business of investing in and lending capital to privately held companies. This is done by tracking the Red Rocks Global Listed Private Equity Index.

The ETF is widely spread across individual securities while heavily skewed toward financial, as these make up for three-fourths of the portfolio. American firms dominate the fund’s return at 39.4% while United Kingdom (17.4%), France (6.9%) and China (6.6%) round off to the next three spots. The fund has $485 million in AUM.

PSP is the high cost choice in the ETF space, charging 2.04% in fees per year from investors. However, it sports an impressive yield of 4.87%. The ETF is up 14.2% in the year-to-date time frame (as of June 3, 2015).

Global Listed Private Equity ETF (PEX)

The fund looks to track the LPX Direct Listed Private Equity Index. It is an overlooked choice as it has managed to accumulate just $15 million in assets so far. The index considers 30 direct private equity investments. The fund charges 60 bps in fees (read: New Alternative Solution ETF from ProShares Hits Market).

North America accounts for over half of the basket while U.K. takes about 25% of the portfolio.  3i Group Plc (10.44%), Ares Capital Corp (10.24%) and Onex Corp. (9.89%) are the three top holdings of the fund. It is up over 5.5% so far this year and yields about 5.59% (as of June 3, 2015). 
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