ETF Investors Get More Private Equity Access

Like their recent innovation of an ETF with a principal protection component, Societe Generale Asset Management is again moving into relatively new territory by introducing a new private equity ETF called The SGAM ETF Private Equity LPX50. Here’s the posting from Hedgeweek.com.

When I say “new territory”, I am referring to private equity where, aside from the arrival of the PowerShares Listed Private EquitySM Portfolio (PSP) late last year which caused quite a bit of buzz, there is little else out there for investors aside from more direct private equity funds or “fund of funds”. However, in my piece on November 6, 2006 (Can Retail Investors Profit From Hedge Fund Access?) I did comment on the Private Equity Index (PRIVEX) and how “we may soon see an ETF linked to this new private equity index which is a collaborative effort between Société Générale Corporate & Investment Banking and Dow Jones Indexes/STOXX”. Well, SGAM has gone forward instead with LPX, a Swiss-based specialist provider of private equity research, on this ETF offering.

Here’s what caught my eye in the piece regarding the underlying index:

• “The LPX 50 Total Return Index is currently the principal benchmark reference of the listed private equity sector, offering liquid and immediate access to the 50 largest listed companies whose core activity is the allocation of private equity capital.”
• “The universe of the LPX50 Index consists of companies and funds that are listed on a recognised stock exchange and at least 50 per cent of whose total assets are invested directly or indirectly in the private equity sector, while pursuing a defined and clear exit strategy for their committed investments in order to redistribute capital gains to their investors.”
• “The index represents 70 per cent of the sector's global market capitalisation and is diversified across all segments of private equity (venture, growth and buyout capital) and regions (Europe, the US and Asia).”
• “The LPX50 Total Return Index covers firms and funds selected not only for their size but also for their liquidity. Index composition is determined on the basis of a wide range of factors, including market capitalisation, weekly trading volume and average bid-offer spread. The index is rebalanced twice yearly.”

In many ways, this ETF looks similar to PSP, but there are some differences:

• Cost: It’s slightly more expensive at 70bps versus PSP at 60bps.

• Number of holdings: According to the PowerShares site for PSP, there are about 35 holdings as of January 30th versus the LPX 50.

• Rebalancing: SGAM’s offering is rebalanced semi-annually versus PSP which is quarterly.

• According to the new information, the SGAM ETF will have exposure to Europe, US and Asia while PSP has exposure only to the US.

I like the idea of accessing private equity with the benefits of an ETF, but I like even more the idea of global exposure. There’s been a lot press on the various downsides of private equity investing via an ETF (or at least focused on the mechanics specific to PSP), so it will be just a matter of time before similar analysis is done on this new ETF from SGAM.

With recent news of an infrastructure ETF and now more for private equity, I guess the only area left to be covered is hedge funds. There are various hedge fund indices out there… who will be first to link an ETF to one? I personally hope that doesn’t happen. A hedge fund index is a “fund of funds” being marketed as an index… but with a significant number of flaws (biases) not found in traditional indexing.

My feeling is that if you’re going to invest in hedge funds and want someone specifically mandated to run a portfolio of hedge funds, they should be given the discretion needed to manage them actively, not in the form of an index. Just my opinion.