Two proposed ETFs plan to tap private equity

Despite a downturn in private-equity returns, two new exchange traded funds providing investors access to that space may soon be launched. The proposed ETFs — one from PowerShares Capital Management LLC of Wheaton, Ill., and the other from Barclays Global Investors of San Francisco — would join what is the only private-equity ETF in existence: the PowerShares Listed Private Equity Fund.
SEP 17, 2007
Despite a downturn in private-equity returns, two new exchange traded funds providing investors access to that space may soon be launched. The proposed ETFs — one from PowerShares Capital Management LLC of Wheaton, Ill., and the other from Barclays Global Investors of San Francisco — would join what is the only private-equity ETF in existence: the PowerShares Listed Private Equity Fund. Financial advisers and other industry experts, however, aren’t sure that ETFs providing access to private equity make much sense for investors, for both tactical and fundamental reasons. Poor returns Private-equity returns have soured recently, largely in reaction to the drying-up of cheap credit to finance deals, industry experts said. The PowerShares Listed Private Equity Fund, for instance, had fallen 9.65% year-to-date as of Sept. 10, while the Standard & Poor’s 500 stock index climbed 3.68%. “It’s not a good time to be allocating to private equity, given what’s happening in the equity market,” said J.D. Steinhilber, founder of Agileinvesting .com of Nashville, Tenn., an investment advisory service focusing on ETFs. But the problems of investing in private equity via ETFs go beyond what’s happening in the markets, he said, noting that retail investors don’t have access to the same investments as institutional investors. The PowerShares fund, for instance, tracks the Listed Private Equity Index, a benchmark of publicly traded companies that invest in private equity. That’s not the same as investing directly in private equity, Mr. Steinhilber noted. To address the direct-investment issue, PowerShares and Barclays filed to launch ETFs that invest in private equity internationally. Such a mandate would give them the ability to invest in private-equity funds that trade on exchanges — which are popular in Europe. However, that phenomenon has not yet caught on in the United States.
Financial advisers, however, still are not convinced that private-equity ETFs make sense for their clients. “I don’t have enough information,” said James Kibler, president of Eldridge Financial Planning LLC of New York. “Objectively measured returns on private equity haven’t been available long enough to allow me to make a judgment on that.” A lack of historical returns was also an issue for Marvin Appel, chief executive of Appel Asset Management Corp. in Great Neck, N.Y. “I think [private-equity ETFs] potentially could be a diversifier,” he said. “But I don’t think there’s much historical precedent.” It’s a problem Ibbotson Associates, a subsidiary of Morningstar Inc. of Chicago, is addressing in a white paper that will be ready this fall. The paper was commissioned by Denver-based Red Rocks Capital Partners, the investment management firm behind the indexes upon which PowerShares has tied its private-equity ETFs. The white paper aims to determine how private-equity ETFs fit into a portfolio, said Tom Idzorek, vice president of research and product development at Ibbotson. But “I suspect we might feel that these kinds of new, equitized private-equity vehicles are somewhat like” real estate investment trusts, he said. Way to diversify Investors can’t access real estate directly — just as they can’t access private equity directly — so they do it through REITs, he said. And REITs have proven themselves to be a great diversifier, Mr. Idzorek said. If private-equity ETFs prove to offer the same kind of diversification, it may be wise for investors to include them in their portfolios, he said. That’s not necessarily the case, Mr. Steinhilber said. Investors may be able to achieve the same level of diversification using leveraged ETFs, he said. “In general, I’m not really enamored with [private-equity ETFs], and not planning to use them in client portfolios,” Mr. Steinhilber said.

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