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Gain Exposure to an Area of the Market That's Normally Off-Limits
to Small Investors |
Published: November 5,
2007
In September, the PowerShares
International Listed Private Equity ETF (AMEX: PFP, $27.15) became
one of the latest funds in the growing PowerShares family to make its
market debut. The fund does not invest directly in private equity
companies, but rather publicly-traded firms that are heavily involved in
the private equity markets.
The fund tracks the performance of the Red Rocks International Listed
Private Equity Index. According to PowerShares, this index, which is
comprised of several dozen companies, represents a stake in more than
1,000 private businesses around the globe. Top holdings include names
like Macquarie, SVG Capital, and KKR Private Equity Investors.
Unlike the PowerShares Listed Private Equity ETF (AMEX: PSP), the fund's
predecessor, PFP adds some international flavor. Roughly one-fourth of
the fund's assets are invested in the United Kingdom, with the rest
spread throughout France, Australia, Japan, and several other countries.
With an expense ratio of 0.75%, PFP checks in on the high side in terms
of costs. However, highly specialized funds with solid track records
sometimes justify the higher price tag. And judging by back-tested data,
shareholders may not mind paying a little extra.
As of June 29th, the fund's index has produced hefty annualized gains of
+31.3% over the past five years. That is well ahead of the +18.2% return
of the broader MSCI EAFE Index and nearly double the +16.1% of the MSCI
AC World Financial Index -- with nearly identical volatility. In fact,
the fund's index has beaten both of those two benchmarks every single
year since 2002, while turning a $10,000 investment into nearly $40,000.
With deep pockets and ready access to cheap capital, private equity
groups have been on an unprecedented buying spree in the last few years,
providing an influx of cash to emerging firms and gobbling up larger
companies left and right in eye-popping multi-billion dollar leveraged
buyout deals. Once the acquired company has been dusted off and
polished, the end goal is to either sell it at a substantial profit or
bring it back public through a new IPO.
The results speak for themselves: over the last two decades, investments
in private equity firms have delivered a sizzling +14.2% annualized
return. Again, the fund is not a direct play on private equity, though
it does give retail investors exposure to a highly lucrative asset class
that, for the most part, has been off-limits to all but pension funds,
trusts, and other institutional money.
Our View --> Private equity
investments have been hot for years, but we wonder whether it may be too
late to get in the game -- and this past summer's credit crunch only
underscores the risks.
Already, a number of private equity deals have been shelved lately
because financing fell through or became less favorable. Plus, central
banks in Europe (where most of the fund's assets are deployed) are
considering rate hikes, which could crimp profits.
All things considered, the PowerShares
International Listed Private Equity ETF (PFP) looks to be a promising new fund in a
lightly-treaded corner of the market, but right now does not appear to
be the best time to get on board.
Good investing!
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Nathan Slaughter
Editor
The ETF Authority, Half-Priced Stocks
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