Taking part in Private Equity Funds through PowerShares PSP

BusinessWeek has an interesting article this week on smaller investors being able to take part in private equity investing.   Until now private equity funds have generally required investors to be “accredited” meaning they must have a net worth of over 1 million dollars (excluding personal real estate) which put private equity investing out of reach for many.  Some private equity funds have recently dropped minimum investments to as low as $250,000, though that is still out of reach for the vast majority of investors who seek to diversify their investments broadly.  A more accessible means to take part in private equity investing may be the new PowerShares Listed Private Equity Portfolio (symbol: PSP) Fund.

For those who aren’t familiar with private equity, private equity is broadly defined as any type of investment in a company that isn’t publicly traded.  Private Equity Funds are the large pools of capital, invested by private equity groups that buy public companies (many times through leveraged buyouts), take them private (delist them from the public exchange), perform cost cutting measures and restructuring activities (sometimes selling off business units), and eventually take the company public again or sell it in pieces to create liquity and reap their investment returns.

Private Equity Funds and Leveraged Buyouts have become the rage lately in deals such as the Texas Utility (TXU) and Equity Properties buyouts.  The lure of investing in private equity funds is that the returns for these funds can be much higher than the market average. The BusinessWeek article states only the top 25% beat the market though, the rest are at or below the average market returns.  In general, private equity funds require large investments, charge high fees and can offer much lower liquity than the public markets.  In other words, private equity is only accessible to the big guys…until now.

PowerShares Listed Private Equity Portfolio (symbol: PSP) Fund is a relatively new ETF that invests in the top 30 publicly traded private equity groups in an effort to track the Red Rocks Capital Listed Private Equity Index.  The Red Rocks Capital index has beat the Russell 2000 index over the past 5 and 10 years (though meets or slightly lags over the past 1 and 3 years). While private equity investing does offer higher risk, it can potentially offer higher reward and, just through the nature of the meaning of private equity, is an area of the economy that is difficult to invest in through any other low-entry means. 

Although the addition of the PowerShares Private Equity Index is just another ETF in the growing sea of the 450 ETF’s now trading on the exchanges, it may offer a valuable way to increase diversification in your portfolio. 

Resources:

• PowerShares Listed Private Equity Portfolio Home Page
• Reuter’s List of the Top 10 Leveraged Buyouts
• Wikipedia page on Private Equity Funds