Unlocking Private Equity Etf Investment Strategies

Private equity exchange-traded funds (ETFs) are a way to gain exposure to private equity investments, which are typically only accessible to high-net-worth entities. Private equity firms invest in private companies, often startups, that are not publicly traded on stock exchanges. Private equity ETFs are a less volatile asset class that can offer stable returns and higher dividends. They are also a way to diversify your portfolio geographically. While private equity investing can be very risky, ETFs are a more accessible way to gain exposure to this asset class without requiring a large cash outlay.

Private equity ETFs: what are they?

Private equity exchange-traded funds (ETFs) are a type of investment vehicle that focuses on deploying capital to private companies, rather than investing in publicly traded stocks on stock exchanges. Private equity firms pool investors' capital to invest in private companies, often in the form of venture capital for startups or by taking over and restructuring mature companies.

Private equity ETFs are typically geared towards high net worth entities, providing them with equity rights in companies with significant growth potential. These companies are usually seeking additional capital to improve their cash flow or expand their operations. Private equity firms not only provide financing but also offer financial expertise to help run the businesses they acquire.

Private equity ETFs provide investors with exposure to private equity investments, allowing them to benefit from the potential attractive returns in this asset class. The funds invest in a portfolio of publicly listed private equity companies, business development companies, and financial institutions.

One of the most popular private equity ETFs is the Invesco Global Listed Private Equity Portfolio (PSP), which offers global exposure to approximately 70 publicly listed private equity companies worldwide. Another popular option is the ProShares Global Listed Private Equity ETF (PEX), which aims to provide investors with returns similar to the performance of the LPX Direct Listed Private Equity Index.

Benefits of Private Equity ETFs

Private equity ETFs offer several benefits to investors:

• Portfolio Diversification: These ETFs provide diversification not only from a geographical standpoint but also in terms of the types of investments they hold.
• Less Volatility: Private equity is typically considered a less volatile asset class compared to public equities, offering stable returns and relatively higher dividends.
• Access to Private Companies: Private equity ETFs allow investors to access private companies that are not listed on stock exchanges, providing opportunities to invest in high-growth businesses.

Considerations for Investing in Private Equity ETFs

While private equity ETFs offer attractive benefits, there are also some considerations to keep in mind:

• Financial Complexity: Private equity ETFs can be financially complicated due to their use of leverage and strong transaction orientation.
• Risk and Volatility: Private equity investing, in general, is considered speculative and risky due to the high-stakes nature of the investments.
• Fees and Expenses: Private equity ETFs may have higher management expenses compared to direct private equity investments, and investors should also consider brokerage fees when buying or selling shares.

How to access the private equity market via ETFs

Private equity companies are not listed on the stock exchange, so they are not directly investable for ETF investors. However, some large private equity companies are themselves listed companies and raise capital on the equity market. These listed private equity companies can be aggregated in an index that underlies an ETF.

Choosing a private equity ETF

When choosing a private equity ETF, consider the following factors in addition to the methodology of the underlying index and performance of an ETF:

• Size
• Cost
• Age
• Income
• Domicile
• Replication method
• Fund size

Examples of private equity ETFs

• Invesco Global Listed Private Equity Portfolio (PSP)
• ProShares Global Listed Private Equity ETF (PEX)
• IShares Listed Private Equity UCITS ETF USD (Dist)IE00B1TXHL60
• Xtrackers LPX MM Private Equity Swap UCITS ETF 1CLU0322250712
• FlexShares Listed Private Equity UCITS ETFIE0008ZGI5C1
• IShares Listed Private Equity UCITS ETF USD (Acc)IE000D8FCSD8

Benefits of investing in private equity ETFs

Private equity ETFs provide investors with exposure to private equity investments and can offer significant and attractive returns on investment. They also offer portfolio diversification from a geographical standpoint and in terms of investments.

Popular ETFs: PSP and PEX

The Invesco Global Listed Private Equity Portfolio (PSP) and the ProShares Global Listed Private Equity ETF (PEX) are two of the most popular ETFs available today. Both ETFs provide investors with access to private equity, which was previously only available to institutional investors and very well-capitalized individuals.

Invesco Global Listed Private Equity Portfolio (PSP)

The Invesco Global Listed Private Equity Portfolio is the largest private equity ETF, with assets totalling over $267 million as of February 2022. It provides investors with global exposure to approximately 70 publicly-listed private equity companies worldwide, including business development companies and financial institutions. The fund tracks the Red Rocks Global Listed Private Equity Index, which includes securities, ADRs, and GDRs of 40 to 75 private equity companies. The expense ratio for this fund is 1.44%, and it offers a high distribution yield of 11.34%. Holdings are concentrated among American companies (37%), U.K. firms (21.5%), Europe (36%), and the remainder in Asia.

ProShares Global Listed Private Equity ETF (PEX)

The ProShares Global Listed Private Equity ETF is a fund that aims to provide investment results that track the performance of the LPX Direct Listed Private Equity Index. This index includes up to 30 publicly-listed private equity companies that primarily invest in or lend capital to privately held companies. Issued by ProShares, this fund has an asset base totalling $26 million as of February 2022. It is ideal for investors seeking global diversity, with holdings allocated to the USA (44.5%), the U.K. (23.5%), and the rest of Europe. The fund has a relatively high expense ratio of 3.31% and offers a distribution yield of 14.31%.

Both the PSP and PEX ETFs have been strong performers, providing investors with access to the private equity market and the potential for significant returns.

Private equity ETF list

Private equity exchange-traded funds (ETFs) are a way for investors to access the private equity market without directly investing in private companies. Private equity ETFs hold companies that can be financially complicated due to their use of leverage and transaction-oriented nature. However, they provide investors with exposure to private equity investments and the potential for significant returns.

• Invesco Global Listed Private Equity Portfolio (PSP): The largest private equity ETF as of February 2022, with assets totalling over $267 million. It provides global exposure to approximately 70 publicly-listed private equity companies worldwide, including business development companies and financial institutions. The expense ratio is 1.44%, and it offers a high distribution yield of 11.34%.
• ProShares Global Listed Private Equity ETF (PEX): Issued by ProShares, this ETF aims to provide investors with results similar to the performance of the LPX Direct Listed Private Equity Index. It includes approximately 30 publicly-listed private equity companies. The fund has a relatively high expense ratio of 3.31% and offers a distribution yield of 14.31%.
• IShares Listed Private Equity UCITS ETF USD (Dist)IE00B1TXHL60
• Xtrackers LPX MM Private Equity Swap UCITS ETF 1CLU0322250712
• FlexShares Listed Private Equity UCITS ETFIE0008ZGI5C1
• IShares Listed Private Equity UCITS ETF USD (Acc)IE000D8FCSD8

When choosing a private equity ETF, investors should consider factors such as the underlying index methodology, performance, size, cost, age, income, domicile, and replication method.

How much money do you need to invest in private equity?

The amount of money you need to invest in private equity varies depending on the firm and the type of investment.

Private equity firms typically require high minimum investments, often ranging from a few hundred thousand to several million dollars. The standard minimum investment amount has historically been $25 million, but some firms have lowered this to $250,000 or even as little as $25,000. However, it's important to note that these lower minimums are still out of reach for most people.

To directly invest in private equity, you will need to work with a private equity firm. These firms will have their own investment minimums, and you should do thorough research to find one that aligns with your investment restrictions and interests.

If you are unable to meet the minimum investment requirements of private equity firms, there are alternative ways to gain exposure to private equity. One option is to invest in private equity exchange-traded funds (ETFs). ETFs offer access to publicly listed private equity companies, and they typically do not have minimum investment requirements. However, ETFs come with additional layers of management expenses and brokerage fees.

Another option is to invest through a fund of funds, which holds shares of multiple private partnerships that invest in private equities. The minimum investments for these funds can range from $100,000 to $250,000, and they may also require you to have a net worth of $1 million to $5 million. While this approach provides greater diversification and potentially lower risk, it also involves an extra layer of fees.

It's worth noting that, in addition to meeting the minimum investment requirements, you may also need to be an accredited investor. This means having a net worth of over $1 million or an annual income of more than $200,000 in the last two years.

Overall, investing in private equity typically requires a substantial amount of capital, and the specific amount needed depends on the firm and the investment strategy. It is important to carefully consider your options and conduct thorough research before making any investment decisions.

Frequently asked questions