It used to be that Private Equity investment was for the wealthy. Not anymore. Red Rocks Capital in Golden, Colorado has created an index named the Listed Private Equity Index (LPE), consisting of public companies that invest in private equity deals. From this index a new ETF (available through PowerShares - Ticker: PSP) was created, allowing any investor to gain access to the asset class. Although investment in the ETF is not exactly a direct investment in the actual private equity deals, it is an investment in the companies that invest in private equity. In other words, the revenues of these public companies in the ETF are derived from the private equity deals in which they participate.
The ETF consists of at least 30 publicly traded companies that do business in the private equity arena. Together, these companies have investments in more than 1,000 private business deals diversified across all market caps, styles and various stages of business development.
The ETF is unlike a direct investment in a private equity fund, or fund of funds, which have:
1) Large minimum capital investment, usually $500,000 or more
2) Substantial lock-up periods where the investor may not be able to withdrawal their capital without a severe penalty
3) Relatively high fees that consists of a management fee (usually 1% or more) AND an incentive fee or share of profits generated (usually 5% or more) and
4) Lack of transparency.
The ETF on the other hand has no minimum investment, no lock-up, a 75 basis point expense ratio, and complete transparency of the companies it is invested in (but does not include the underlying private deals).
Although the terms are very favorable for the ETF, the investor needs to understand that they would not have an actual stake in any of the private deals, rather only an investment in the public companies that derive their revenue from those deals. Back-tested performance of the Listed Private Equity Index has proven to be not only appealing, but also has demonstrated a relatively low 0.72 correlation to the S&P 500 over the past 10 years. Additionally, even though there is no lock up period, investors allocating to the asset class should plan for a long time-horizon as most private equity deals take several years to work themselves out and revenues may not be booked until certain hurdles are achieved.
All in all, this new ETF is a great way for the “average investor” to gain access to an asset class that used
to be out of reach. For more information on Red Rocks Capital and to learn about the Listed Private Equity Index, go to www.listedprivateequity.com, and to learn more about the ETF derived from the Listed Private Equity Index, go to www.powershares.com.