Did you know you could invest in the public stocks of private equity (PE)? This is an area I personally don't see much attention to by analysts, but one that deserves attention nonetheless. PE firms leverage their expertise in identifying undervalued or underperforming companies, implementing operational improvements, and strategically exiting these investments at a premium. This business model enables PE firms to generate significant returns for their investors, which can translate into strong financial performance for the PE companies themselves.
Additionally, investing in PE stocks allows investors to benefit from the professional management and strategic insights of seasoned investment professionals, while also potentially receiving attractive dividend payouts derived from the management fees and performance incentives that PE firms charge their funds. However, it's important to consider the inherent risks, including market volatility, reliance on successful deal execution, and regulatory changes, which could impact the profitability and valuation of PE firms.
The Invesco Global Listed Private Equity ETF (NYSEARCA:PSP) serves as an investment vehicle targeting the private equity sector. It follows the Red Rocks Global Listed Private Equity Index, committing at least 90% of its assets to the securities that are featured within the index. This includes both American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
This index represents a diverse range of 40 to 75 private equity firms, capturing entities like business development companies (BDCs), master limited partnerships (MLPs), and others engaged in financing, investing in, or offering services to private companies. The PSP fund and its underlying index are subject to quarterly rebalancing and reconstitution to maintain their strategic focus and alignment with the private equity landscape.
Understanding the ETF Holdings
Top holdings include:
EQT is a prominent firm in the private equity and venture capital sector, known for its emphasis on leveraged buyouts, venture capital, and growth capital initiatives.
The Carlyle Group stands out as a global investment powerhouse, offering expertise in corporate private equity, real assets, global credit, and various investment solutions, marking its position as one of the most extensive and versatile investment entities worldwide.
TPG distinguishes itself as a foremost global private investment firm, boasting a broad array of investment platforms worldwide. The firm is actively involved in a multitude of sectors, including but not limited to healthcare, consumer/retail, internet/digital media, and real estate.
Blackstone emerges as a premier investment firm globally, dedicated to generating positive economic outcomes and lasting value for its investors, the enterprises it engages with, and the communities it serves.
3i Group, headquartered in London, UK, operates as a global entity in the private equity, venture capital, and debt management spheres, with a keen focus on mid-market Private Equity and Infrastructure investments.
When we look at the geographic makeup, we can see 42% of the fund is located in the US, with the rest in other developed countries.
Sector Allocation and Weightings
The Invesco Global Listed Private Equity ETF holds investments in a variety of sectors, with the largest allocations in Services, Industrials, Consumer Discretionary, and Financials. There are also smaller allocations in the Communication, Information Technology, and Health Care sectors.
No surprises here, but the majority of the fund is Financials, sitting at 83%. There's a small allocation to companies in the Industrials and Consumer Discretionary sectors, but a bet here is ultimately a bet on an expansionary environment where credit is flowing and investment opportunities for private equity are healthy.
Peer Comparison
The ProShares Global Listed Private Equity ETF (PEX) is the closest comp. Both PSP and PEX are exchange-traded funds focused on the private equity sector, but they differ in several aspects. PSP, launched on October 24, 2006, has significantly larger assets under management of $219M compared to PEX's $8.3M, indicating potentially greater stability and investor confidence. PSP has a lower total expense ratio at 1.06% than PEX, which has an expense ratio of 2.79%. In terms of relative strength, PSP has been solidly outperforming PEX since November.
I compared against Financials because relative to the S&P 500, PSP has done poorly. This is not unexpected given that the S&P 500's performance for many years has been dominated by Technology instead of the Financials sector more generally. Interestingly enough, that price ratio may have bottomed.
Pros and Cons of Investing in PSP
One of the primary benefits of PSP is the access it provides to the global private equity market, which is typically difficult for individual investors to enter. On the downside, investing in PSP carries risks inherent to private equity investments. These include potential fluctuations in foreign currencies, political and economic instability, and foreign taxation issues. Additionally, the fund's return may not always match the return of the underlying index.
Relative to the Financials Select Sector SPDR ETF (XLF), it appears to be in a nice uptrend here, suggesting further relative strength against the sector could continue.
Conclusion: Is Investing in PSP Worth It?
Investing in PSP is interesting. It's a part of the marketplace not often talked about and can provide some interesting diversification benefits to an overall portfolio, not just because of the private equity side, but also the global weightings. It's worth considering, so long as we remain in an expansionary environment that benefits dealmaking and investing in private companies.
Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.
The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals--it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).
