Private equity is often viewed as an investment reserved for the ultra-rich but, thanks to the ETF issuers like PowerShares, investment in small privately held companies is increasingly available to the smaller investor too.
The PowerShares Listed Private Equity ETF (BATS: PSP) doesn’t invest directly in privately held companies but does invest in business development and venture capital firms that often invest in and attempt to bring these companies public. This ETF and the ProShares Global Listed Private Equity ETF (BATS: PEX) are the only ones listed by the ETF Database that target private equity as an investment objective. The ProShares ETF currently has roughly $436 million in assets under management.
While private equity is likely missing from many investor portfolios, it’s an asset class that comes with high risk, high return potential and, perhaps surprisingly, high yields. The inherent riskiness that comes with an investment in boom-or-bust privately held small companies is coupled with the fact that this ETF maintains a large allocation to overseas investments including emerging markets in both Europe and Asia.
The Listed Private Equity ETF is also fairly sector concentrated with over half of assets currently in financials making this ETF vulnerable to changes in interest rates and broad economic activity. An expense ratio of over 2% makes this a costly investment that will eat directly into investor returns.
One of the great benefits of this product, however, is its yield. This fund currently sports a trailing 12 month dividend yield of 8%. It’s not necessarily a great product for those looking for regular predictable income from their portfolios as the dividends are very cyclical and can vary significantly on a quarter to quarter to basis.
This dividend yield has been the saving grace for this ETF lately. The share price has been virtually flat over the past 5 year period but the big yield has pushed the fund to a 44% total return over the past 5 years. That works out to an average annual return of about 7% per year. That number trails the S&P 500’s average annual return of 11%.