Private equity exchange-traded funds (ETFs) hold companies that can be financially complicated because they use leverage and are strongly transaction-oriented. However, they provide investors with exposure to private equity investments and can offer significant and attractive returns on investment.
- Private equity is an investment category that deploys capital to private companies, not publicly traded on stock exchanges.
- Investors can still access this market via ETFs that trade on exchanges and invest in PE and related firms.
- PSP and PEX are two of the most popular ETFs available today.
What Is Private Equity?
Private equity (PE) firms have been increasingly active over the past two decades. Private equity involves pooling capital in order to invest in private companies, which may come in the form of venture capital (VC) to startups, or by taking over and restructuring mature firms, often via leveraged buyouts (LBOs).
Private equity caters to the capital of high net worth entities. It obtains equity rights in companies with significant potential that are seeking capital to improve their cash flow positions or expand. Private equity firms provide finances and the financial knowledge to run the businesses they acquire.
Today, the majority of the world’s private equity assets are based in North America. Europe has the next largest allocation, followed by Asia. Private equity ETFs offer portfolio diversification from a geographical standpoint and in terms of investments. These firms utilize a variety of strategies for acquiring equity stakes or debt positions that are not generally accessible to individual investors. Private equity is typically considered a less volatile asset class that can offer both stable returns and relatively higher dividends.
Invesco Global Listed Private Equity Portfolio (PSP)
The Invesco Global Listed Private Equity Portfolio (NYSE Arca: PSP) is the largest private equity ETF, with assets totaling over $267 million as of February 2022. It is the perfect option for investors looking for global exposure, as it provides access to approximately 70 publicly-listed private equity companies worldwide, including business development companies and financial institutions. This fund tracks the Red Rocks Global Listed Private Equity Index. The index incorporates between 40 and 75 publicly listed equity companies.
The expense ratio for this fund is 1.44% and it offers a high distribution yield of 11.34%. Holdings are concentrated 37% among American companies, 21.5% to U.K. firms, and 36% to Europe. The remainder is made up of Asian PE firms.
ProShares Global Listed Private Equity ETF (PEX)
The ProShares Global Listed Private Equity Portfolio (BATS Trading: PEX) is a fund that aims to provide investors with results, excluding fees, similar to the performance of the LPX Direct Listed Private Equity Index. This index, similar to the underlying index of PSP, includes up to approximately 30 publicly-listed private equity companies which share a primary purpose and function to invest in privately held companies and to lend capital.
Issued by ProShares, this fund has an asset base that totals $26 million as of February 2022. This fund is ideal for investors who are looking for global diversity. The fund has a relatively high expense ratio of 3.31% and offers a distribution yield of 14.31%. Holdings for this fund are allocated 44.5% to the USA, 23.5% to the U.K., and the balance to Europe.