Retail investors this week will gain further access to private equity, via an exchange-traded fund (ETF) offered by PowerShares Capital Management, a Wheaton, Ill.-based asset management firm. The vehicle will trade on the AMEX, and will invest in underlying companies whose principal business is to invest in—or lend capital to—privately-held companies.
ETFs initially issue their shares in large blocks called “creation units” that are purchased by institutional investors. The institutions then often break up the units into smaller bundles or into individual shares, which can then be sold on the secondary market.
The PowerShares Listed Private Equity Portfolio will initially contain 34 publicly-traded firms, based on an index formulated by Red Rocks Capital of Golden, Colo. Each firm must have a minimum market capitalization of $50 million, and its stock must be trading at above $1 per share. Each security has a different weighting, and they must have a majority of assets invested in privately held companies or have the stated intention to have a majority of assets invested in private companies, according to a press release issued last week.
Included in the initial portfolio are business development companies, such as Apollo Investment and American Capital Strategies, lenders such as Silicon Valley Bank and CIT Group, and some 1990s throwbacks, such as CMGI and Safeguard Scientifics. Each initial portfolio company is U.S.-based. But it is unclear if the ETF will eventually expand to include foreign securities. If so, it would be able to choose from such options as Onex Corp., 3i Group and Euronext-listed funds from Apollo Management and KKR.
“We’re hoping that this will help broaden the types of institutions that can invest in private equity, which would help them to diversify their portfolios,” says Mark Sunderhouse of Red Rocks Capital Partners. “Defined contribution plans now will have access.”
But certain critics already are sharpening their knives. Internet news reports last week asked if this was just further confirmation of a private equity bubble, and if retail investors would be able to understand the illiquid nature of the underlying assets (i.e., portfolio companies of the portfolio companies).
Sunderhouse acknowledges that the private equity market itself is showing some signs of “going public” exhaustion, but insists that investors are rightfully interested in the ones already out there. he adds that an ETF is among the safest ways to diversify into private equity. He compares the current opportunity to REITs, which also were initially scorned, in part, because of their underlying illiquidity.
The ETF is set to begin trading on the AMEX Tuesday.