Private equity ETFs deliver strong returns in 2015

Aug 4th, 2015 | By | Category: Alternatives / Multi-Asset

Listed private equity ETFs have enjoyed a strong year so far, with the Lyxor Privex UCITS ETF (PVX), PowerShares Global Listed Private Equity UCITS ETF (PSSP) and iShares Listed Private Equity UCITS ETF (IPRV) posting returns of 18.0%, 7.1 %, and 7.7% respectively in the period from 1st January 2015 to 23rd July 2015, far exceeding the S&P 500 index’s return of 1.9%.

Global private equity ETFs provide strong returns in 2015

Strong performance from firms such as 3i has powered listed private equity ETFs higher in 2015.

These ETFs invest in a combination of listed private equity asset managers that oversee a collection of funds investing in different forms of private equity, as well as listed private equity funds, offering exposure to venture capital, mezzanine financing, distressed debt and leveraged buyout investments across a range of sectors such as retail, information technology, infrastructure and real estate.

Private equity ETFs allow investors to gain exposure to private equity investments while avoiding some of the common downsides of direct private equity investing such as high minimum investment levels and extended lock-up periods.

The private equity managers underlying these ETFs have been able to capitalize on high merger and acquisition levels in 2015, resulting from the availability of cheap financing through near-zero interest rates worldwide. This has led to almost record levels of exit activity.

“Listed private equity firms had a very strong quarter and continue to outpace global indices year-to-date,” said Mike Trihy, Index Manager for the Red Rocks Capital Global Listed Private Equity Index, the underlying index for the aforementioned PowerShares ETF. “During the first half of 2015, worldwide M&A was at its highest level since 2007, and many private equity firms capitalized on robust M&A and IPO markets with profitable exits of their portfolio companies.”

Returns from funds within the private equity sphere tend to be positively skewed: there is a large probability of small or negative returns, but a small probability of very high returns. One of the top-performing large private equity firms in the last six months was Brait, the South African-listed firm and significant constituent of the PowerShares Global Listed Private Equity ETF , appreciating by 47.0% in Q2 alone and up 67.3% year-to-date. Brait recently bought out UK retailer New Look for $1.2bn. It also purchased a majority stake in Virgin Active Health Club.

Another notable contributor was  3i Group, the London-listed FTSE 100 company with a £5bn plus market-cap. This firm is held in significant proportions in all three previously mentioned private equity ETFs. The firm specialises in buyouts of mid-market companies with international potential in the consumer, industrial and businesses divisions, predominantly based in the European and North American markets. The company made a profitable exit from the international architecture firm Foster & Partners in 2014. It currently holds a broad range of investments within its portfolio, including full ownership of Scandlines, the German-Danish ferry operator as well as a majority stake in the British lingerie firm Agent Provocateur. 3i Group is up 26.2% for the first six months of the year.

Fosun International also deserved a mention, Fossun is the largest privately owned conglomerate in mainland China and a major constituent of the PowerShares ETF. It is one of the top performers among private equity firms in 2015. Its businesses cover industrial operations, investment, asset management, and insurance, with many subsidiary companies in each business. The firm also has minor operations in the healthcare industry. The firm recently made a 20% acquisition of BHF Kleinwort Benson, the parent company of the German merchant bank, BHF. It has currently made a bid for the 219-year-old Frankfurt-based private bank Hauck & Aufhäuser, the first outright Chinese purchase of a German bank. This is indicative of the firm’s strategy to gain greater exposure to Europe’s largest economy. The firm’s share price is up an impressive 75.9% since 1st January!

Private equity ETFs

The PowerShares Global Listed Private Equity UCITS ETF (PSSP LN), listed on the London Stock Exchange (there is also a US listed equivalent), is linked to the Red Rocks Capital Global Listed Private Equity Index, which is constructed from a universe of over 490 firms and has a combined market capitalization of around $500bn, making it a respectable proxy for the $3.5tn global private equity market. PSSP currently has 60 holdings of which the largest exposures are 3i Group (5.8%), KKR & co (5.3%), Partners Group (5.1%), Blackstone (5.0%) and Onex (4.7%). There is also a 4.1% allocation to the highly successful firm Brait and a 4.2% allocation to Fosun International. The fund has size and style allocations currently assigned as mid-cap value (38.7%), mid-cap growth (20.6%), small-cap growth (16%), small-cap value (10.6%) and large-cap growth (9.1%), presenting a clear bias to small and mid-cap firms. The total expense ratio (TER) is 0.75%.

The Lyxor PRIVEX UCITS ETF (PVX), trading on the Euronext, SIX Swiss, Borsa Italiana and Xetra exchanges in euros, tracks the SGI Private Equity Total Return Index through the use of swaps. This index represents the 25 largest listed companies around the world involved in a range of private equity activities such as leveraged buyouts, venture capital and growth capital. Current top holdings include Investor AB-B SHS (15.3%), Orix Corp (14.2%) and 3i Group (10.4%). Major country exposures are at present in the United States (19.7%), Japan (19.5%), the United Kingdom (17.9%) and Sweden (16.9%).  The fund has returned 18% since the start of the year to 23rd July. The TER is 0.7%

The iShares Listed Private Equity UCITS ETF (IPRV LN) also offers exposure to large publicly listed firms active in the private equity sphere, trading on developed-market stock exchanges in North America, Europe or Asia Pacific, but adds a wider exposure by currently holding 59 securities in its portfolio. The fund tracks the S&P Listed Private Equity Index, which measures the performance of firms engaged in a range of private equity activities including seed financing, venture capital, mezzanine debt and leveraged buyouts. Top exposures are currently Blackstone Group (7.8%), KKR (7.5%), Brookfield Asset Management (7.2%) and Ares Capital (6.9%). The fund is up 7.7% since January 1st, helped by a 6.8% allocation to 3i Group. The TER is 0.75%.

The Source Nomura Modelled PERI UCITS ETF (PERI LN), listed on the London Stock Exchange, tracks the performance of the Nomura QES Modelled Private Equity Returns Index, a synthetic proxy for the global private equity buyout fund universe. This ETF is unique in that it neither invests directly in private equity funds, nor does it gain indirect exposure to the index through swaps. Rather, using a proprietary model, it invests in a combination of US large-cap and mid-cap indices, as well as significant exposures to cash and a basket of currencies, to simulate the performance of private equity returns using liquid listed instruments. Although this fund is down 3.3% this year, it provides a potential solution for institutional investors looking to equitize committed but un-invested private equity capital. The TER is 0.30%. The fund trades in US dollars.

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