Smaller investors look to private equity ETFs

Gail Mwamba
10 August 2010

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Investors seeking to gain exposure to the private equity asset class have increasingly been looking to use synthetic products. Interest has not only been from smaller investors in search of lower liquidity risks and entry barriers, but LPs sitting on pots of cash waiting to be deployed. Gail Mwamba investigates.

Traditional private equity models have primarily favoured large institutional investors, with smaller investors struggling to cross the high hurdles of large ticket sizes and lengthy lock-in periods. However, the development of structured products has enabled a broader class of investors to commit to the asset class, with exchange traded funds (ETFs) tracking the asset class becoming increasingly popular.

ETFs enable investors to gain access to multiple listed private equity companies by offering exchange traded shares in funds that track private equity indices. Using ETFs, investors are able to synthetically invest in the asset class, without some of the hurdles associated with traditional private equity investing.

The structures not only offer a more diverse exposure to multiple listed private equity companies in a single share, but also mitigate liquidity risks, as they can be actively traded on an exchange. As such, the ETFs offer easier accessibility to private equity to smaller investors such as family offices, private investors and individuals.

Some of the ETFs that seems to be en vogue this year have been the PowerShares Global Listed Private Equity ETFs that track the Red Rocks Global Listed Private Equity Index. The two ETFs, listed in Europe and the US, offer access to a number of large publicly listed private equity players such as 3i, KKR, Eurazeo and Partners Group.

As of January this year the ETFs had collectively reached $182m, signalling a 300% year-on-year rise in assets from 2009. The ETFs have gained additional favour this year, attracting a further $53m to reach $235m on August 05. According to Ben Fulton, managing director and head of global ETFs at Invesco PowerShares, significant interest has also come from some traditional private equity LP investors.

"What we tend to see are investors looking to invest in the products as it is part of their mandate, and not really people looking to trade the products," says Fulton.
"This would include investors that are already direct partners in some of the world's largest private equity funds but are sitting on cash because of private equity deals that have brought back returns, or cash that is waiting to be deployed."

Some investors are additionally attracted to them because they can diversify, without having to carry out due diligence on each and every fund. With the number of exits seen this year, and with GPs still sitting on significant cash to deploy, the products may be on the path to attract even more interest.