(The author is a Reuters contributor. The opinions expressed
are his own.)
By Lewis Braham
Pittsburgh, April 29 Publicly traded private
equity? It sounds like an oxymoron - like jumbo shrimp or
But what was once the exclusive domain of wealthy investors
can now be explored by everyone. Worldwide, there are about 200
public companies listed on exchanges that invest in private
equity. A handful of U.S. mutual funds and ETFs also do so.
Are these "listed" companies worth buying? Yes, but with
Listed private equity has some key differences from an
unlisted investment. One key advantage of listed private equity
- it can be bought and sold any time you please. By contrast,
investors' capital in unlisted private equity funds can be
locked up for several years. Distributions may be made only as
investments are converted to cash, with limited partners having
no right to demand that sales be made.
Liquidity can have its disadvantages too. Because they are
publicly traded, shares of a private equity company like
American Capital sometimes perform differently from
those of the underlying portfolio of private businesses.
Despite the potential for volatile short-term fluctuations,
the long-term returns of listed private equity shares mirror
those of unlisted firms. Listed funds' portfolio returns have a
94 percent correlation to that of unlisted over the last decade,
meaning that their returns are similar 94 percent of the time,
according to Prequin, an alternative asset research firm.
When listed private equity trades at a discount, you have a
chance to get in on a private equity investment on the cheap.
Currently, the average listed private equity company trades at a
discount upward of 15 percent. So you're getting at least a
dollar of private businesses for every 85 cents you invest.
For retail investors, there are currently two listed
private-equity ETFs - PowerShares Global Listed Private Equity
and ProShares Global Listed Private Equity. In
addition, investors can choose from two mutual funds - ALPS Red
Rocks Listed Private Equity and Vista Listed Private
Equity Plus. All four invest in a diverse basket of
listed private equity companies, like American Capital.
The differences in performance between these products
highlight the sector's complexity. Both mutual funds were
crushed in the 2008 crash, each falling by more than 60 percent,
as the private equity sector, in general, suffered from over-
In the surge that's followed, Vista's fund has dramatically
underperformed, producing only a 9.9 percent annualized return
in the last five years through April 22, less than half ALPS'
24.8 percent. The expense ratio for the Vista fund is 2.24
percent of assets and 1.51 percent for the ALP's fund.
One reason for ALPS' outperformance is that it largely
avoids what is known as business development companies, or BDCs.
These invest primarily in the debt of private companies and pay
shareholders the income generated. While BDCs have performed
well in the recovery, paying double-digit yields, other
companies in the sector have done much better.
"BDCs are not private equity," says Mark Sunderhuse, ALPS'
co-manager. "They're yield investments and their returns are
much more correlated with high-yield bonds." Although Sunderhuse
will occasionally buy BDCs when they trade at deep discounts for
his actively managed fund, he largely avoids them because he
sees them as over-valued.
By contrast, Vista's fund has a 20 percent weighting in BDCs
like Fifth Street Finance and BlackRock Kelso Capital
"BDCs are an important part of the asset class," says Vista
co-manager Luke Aucoin. "They still provide much-needed capital
to private companies."
In ALPS Red Rocks' top 10 holdings are private equity
managers Blackstone, KKR and Apollo Global
Management. Although these are some of the most famous
private-equity managers in the world, when you buy their stocks
you are investing in the money managers themselves, not directly
in their underlying private equity funds.
Investing in Blackstone or KKR would be like buying shares
of Fidelity or Vanguard if they traded on the stock exchange
instead of their underlying mutual funds. In addition, the
management fees for running the funds also determine the
performance of the stocks.
"We only want to have exposure to private equity deals, not
the management fees for the funds," says Michel Degosciou,
managing director of LPX Group, a firm that tracks listed
private equity and created the index the ProShares ETF tracks.
For the purest private equity plays, investors have to look
overseas. Two-thirds of Sunderhuse's portfolio is outside of the
United States - companies like Onex in Canada, Eurazeo in France
and Ackermans & Van Haaren in Belgium. They have matched the
sector's stunning performance of late while owning
private-equity directly, just like traditional private equity
funds. They also trade at double-digit discounts to net asset
Despite the strong returns in recent years, the outlook for
the sector remains good. The merger and buyout deals private
equity companies are financing are much more conservative than
in the heady days prior to the 2008 crash. The amount of debt
used to finance the deals is about half what it was in 2007,
With interest rates so low, even that safer level of
leverage is easier to manage. So for those who can stomach the
volatility, now might be the time for oxymorons.
(Follow us @ReutersMoney or here
Editing by Lauren Young and Dan Grebler)