What is Private Equity ETF?
Private Equity ETF is a type of exchange traded fund that only invests in companies that do not trade on stock exchange and provides an opportunity even for small investors to participate and gain from such exposure.
- As PE investment is supposed to be a long term investment, it is illiquid, however, the investment in an ETF provides buying and selling flexibility and therefore generates flexibility and attracts a larger pool of investors.
- Investment required to own a share in a privately held company is huge because these companies are in their growth phase however, they don’t possess the professional management strength of a listed company. For the smooth running of the business, they seek investment from venture capitalists or angel investors and so on. One such investor could be an investment management firm
- These firms, which themselves are listed on the stock exchange, enter into such an investment because they have a longer investment horizon, lower immediate liquidity requirement, and diversification requirement. Therefore they hold huge chunks of PE investment.
- At times these firms enter into the ETF format in which they subdivide their ownership into small units of shares also knows as creation units, for relatively smaller investors to participate in. These shares are sold through the exchange and provide exposure to the PE domain.
- Further, the benefit of investing in an ETF is that it is traded on the exchange and therefore brings greater transparency in PE exposure, which is otherwise not possible in the investment in this domain.
Example of Private Equity ETFs
PSP – Invesco Global Listed Private Equity ETF is one of the most popular ETFs in this domain. The ETF invests a minimum of 90% of its AUM in around 40 to 75 companies which form part of the Red Rocks Global Listed Private Equity Index (Index).
Some important fund details are as follows:
- Cusip: 46137V589
- ISIN: US46137V5892
- Management Fee: 0.50%
- Total Expense Ratio: 1.80%
- Exchange: NYSE Arca
- Inception Date: 24th October 2006
Assets of the funds are mostly allocated in the Financial sector approximating to 70.79% as on 24th December 2019 as per the information published in the Invesco website and the remaining 30% is spread across close to 9 other sectors, of which Industrial sector leads at 10.25%
Further, according to the country-wise allocation, as on the same date, US holds 39.70% of the total AUM and UK holds 18.09%
Based on the nature of the investment, as on 23rd December 2019, the ETF had the following percentages:
#1 – Performance Overview
As compared to the underlying index, Red Rocks Global Listed Private Equity Index (Index), The ETF has been lagging behind in terms of the growth per $10000 as on 30th September 2019 and this is due to the variation in the securities composing the two. The fund’s growth trajectory follows a similar pattern as that of the underlying index because most of its composition contains the same securities, however, the difference in asset allocation has not been favorable to the ETF.
In absolute terms, the value of $10000 became $27,606 for the underlying index and 24,212 for the ETF. Therefore we can say that the tracking error for this ETF is non zero and it has not been able to fully replicate the underlying index.
- Total number of outstanding shares in the fund is 16.35 million having a market value of $206.5 million as on 24th December 2019
- ROE as on 30th September 2019 was 12.58% and was calculated by dividing the net income by net worth.
- The price to book ratio which is calculated by dividing the market price by the book value was 1.80 as on 30th September 2019
#2 – Risk Overview
The risks involved in investing in this ETF are as follows:
- Some of the securities in the ETF are in the form of ADR and GDR, that is the underlying investment is made in foreign companies and therefore are subject to currency risk and country risk.
- As the investment is made in the stocks of smaller companies, the returns get affected by the slowdown in their respective economy more brutally and quickly than the returns on the stock of publicly listed companies
- Further, there is a lack of liquidity in such an investment.
- This particular fund is focused on the Financials sector and therefore is less diversified. Therefore any small negative force in the sector has a greater impact on the returns.
- Lack of availability of public information doesn’t help the investors much as the investment is not an informed one.
So we can understand that the PE ETF is a way through which the relatively smaller investors can get exposure to privately held companies in order to diversify their portfolio. Although this exposure is possible, investment in ETF can only be made in multiples of creation unit blocks, which is not very small and therefore we say such an investment is only ‘relatively’ small, when compared to a direct investment in the private equity domain.
It is a means for the investment management firms to generate capital that they might invest in such companies in expectations of huge returns, however, the risk of such an investment is higher than investing in any other listed security.
This has been a guide to what is Private Equity ETF and its definition. Here we discuss an example of private equity ETF with its performance and risk overview along with a detail explanation. You can learn more about from the following articles –