Wall Street's New ETFs: Tapping into the Private Equity Boom

The private equity market has long been the preserve of high net worth individuals and institutional investors, but that's changing. Wall Street is now offering exchange-traded funds (ETFs) that mimic the private equity boom, making this lucrative investment space accessible to everyday investors. Let's dive into the world of private equity ETFs and explore their potential benefits and risks.



Private equity firms have been increasingly active over the past two decades, investing in private companies through venture capital or leveraged buyouts. These firms pool capital from high net worth entities and invest in companies with significant potential, providing them with the finances and financial knowledge to run their businesses. Today, the majority of the world's private equity assets are based in North America, followed by Europe and Asia.

Private equity ETFs offer investors the opportunity to gain exposure to this market without the need for direct investment. Two popular options are the Invesco Global Listed Private Equity Portfolio (PSP) and the ProShares Global Listed Private Equity ETF (PEX).

PSP, the largest private equity ETF, provides access to approximately 70 publicly-listed private equity companies worldwide, including business development companies and financial institutions. It tracks the Red Rocks Global Listed Private Equity Index and has an expense ratio of 1.44% and a high distribution yield of 11.34%. Holdings are concentrated in the U.S. (37%), U.K. (21.5%), and Europe (36%), with the remainder in Asia.

PEX, issued by ProShares, aims to provide investors with results similar to the performance of the LPX Direct Listed Private Equity Index. This fund has an asset base of $26 million, a relatively high expense ratio of 3.31%, and offers a distribution yield of 14.31%. Holdings are allocated 44.5% to the USA, 23.5% to the U.K., and the balance to Europe.

While private equity ETFs offer investors the potential for significant and attractive returns, they also come with risks. These funds invest in companies that can be financially complicated due to their use of leverage and transaction-oriented nature. Additionally, little public information exists for private and thinly traded companies, which can make it difficult for investors to make fully informed investment decisions.

Geopolitical risks and regional economic performance can also influence the performance of private equity ETFs. Given the concentration of holdings in the U.S. and Europe, these funds are exposed to geopolitical risks and regional economic performance in these areas. Political instability, trade disputes, or regulatory changes in the U.S. and Europe can affect the operations and profitability of the companies held by these ETFs, impacting their performance.

In conclusion, private equity ETFs offer investors the opportunity to tap into the private equity boom and gain exposure to this lucrative investment space. However, it is essential to consider the risks associated with these funds, including financial complexity, lack of public information, geopolitical risks, and regional economic performance. By understanding these factors and conducting thorough research, investors can make informed decisions about their investments in private equity ETFs.