What is Private Equity ETF?
Private equity refers to the investments made by big time investors like high net worth individuals, institutional investors or private equity firms in a privately held company. Now, in order to offer investment opportunities to the smaller investors, the private equity firms then issue relatively smaller units of shares, and these units are known as “private equity ETF”.Although the company in which the investment is made is not traded on the exchange, but the ETFs can be traded on the stock exchange and hence the name.
Now, let us look at the working of private equity ETF in more detail.
- Generally, private equity investment is made with a long term horizon, which results in illiquidity in the near term. Most small investors avoid such illiquid funds. So, private equity ETF attracts
small investors as it solves the liquidity issue by introducing the option of exchange trading that makes buying and selling fairly easy.
- The quantum of investment required to acquire ownership in a privately held company is usually quite huge as these investee companies are often in the growth phase. However, the limitation of huge investment is mitigated by issuing smaller units to pull in smaller investors.
- Typically, the investee companies don’t possess a strong and professional management team like that of a listed company. In such a scenario, these companies seek help from investment management firms to run the business smoothly and this is where the private equity firms come into play. In most cases, these private equity firms are listed on the stock exchange are able to raise money on behalf of the investee companies.
- Basically, the private equity firms invest a large amount of money in these companies and then subdivide their ownership into relatively smaller units of shares, which eventually become ETFs. Consequently, smaller investors are able to participate and acquire exposure to the private equity domain.
- Since these ETFs can be easily traded on the exchange, it offers greater transparency in the private equity domain for the smaller investors. Otherwise, transparency is an issue in the private equity domain given the nature of the investee companies (privately held).
Features of Private Equity ETF
Some of the features of private equity ETF are as follows:
- These types of funds make investment in companies that are highly leveraged and strongly transaction-oriented.
- The investee companies exhibit the significant potential to grow through expansion or operational improvement and for that they require capital, which comes in the form of private equity.
- These funds cater to the needs of the smaller investors who seek to participate in the private equity domain.
- The private equity firms don’t just provide finances, they also extend their financial expertise to run the business smoothly.
- North America has the majority (56%) of the private equity assets available across the globe, followed by Europe (29%) and Asia (11%).
Examples of Private Equity ETF
Now, let us look at some of the top private equity ETFs available across the globe:
- Invesco Global Listed Private Equity ETF: This private equity fund is listed on NYSE Arca (ticker: PSP) and is one of the largest private equity ETF with assets of around $157 million as of Sep 02, 2020.The fund has the highest allocation in the financial sector (64.0%) and geographically it has a major interest in the US (42.7%). It offers global exposure for the investors as it has diversified investment in 8 different sectors across 10 countries, having access to 79 publicly listed private equity companies and funds. The benchmark index for this fund is the Red Rocks Global Listed Private Equity Index. The net expense ratio of the fund is 1.78% while it generates an ROE of 4.83%.
- ProShares Global Listed Private Equity ETF: This private equity fund is listed on the Cboe BZX trading platform (ticker: PEX) and has net assets of around $16 million as of June 30, 2020. The fund is invested in 30 listed private equity companies with major investment in the financial sector with a sectoral weightage of 91.6%. The benchmark index for the fund is the LPX Direct Listed Private Equity Index. The net expense ratio of the fund is 3.13% while it generates a dividend yield of 6.53%.
Benefits of Private Equity ETF
Some of the major benefits are as follows:
- Given that the private equity firms have deep pockets, the companies availing the private equity route find access to abundant financial resources. Such funding help the investee companies to grow through product launches, expansion, or diversification.
- The private equity firms leverage their network of industry experts to add more value to the companies in which they invest. They help in the improvement of the existing operations to achieve ambitious goals.
- The smaller investors are able to gain exposure in the large private help companies through private equity funds.
- Private equity ETFs offer greater transparency for the investors, which otherwise is not possible in the private equity domain.
So, it can be seen that a private equity ETF is a financial instrument that allows the relatively smaller investors to have exposure in privately held companies. Basically, a larger pool of investors are attracted to this type of fund given that the investment size per unit is relatively smaller than the overall investment of the private equity firm and the units can be easily traded on the stock exchange.
This is a guide to Private Equity ETF. Here we also discuss the introduction and examples of private equity etf along with benefits and features. You may also have a look at the following articles to learn more –