Private equity refers to private, rather than public, ownership of a business. Instead of a company’s shares trading on the public stock market, the shares are owned by a small group of people.
Some investors specialize in private equity, often buying enough shares to gain full control of a business, improving that company, and selling the shares for a large profit down the road. This requires significant resources and isn’t typically an option for everyday investors.
Private equity ETFs give normal investors a way to get involved in the private equity market. We reviewed seven private equity ETFs to produce this list of the best options, presented in no particular order.
|ETF Name||AUM (As of Nov. 3, 2021)||Expense Ratio||Inception Date|
|Invesco Global Listed Private Equity Portfolio (As of Oct. 31, 2021)||$285.2 million||1.44%||10/24/2006|
|Exos SPAC Originated ETF||$18.4 million||1.00%||1/26/2021|
|iShares Listed Private Equity UCITS ETF||$1.2 billion||0.75%||3/16/2007|
|VanEck BDC Income ETF||$515.0 million||10.07%||2/11/2013|
Invesco Global Listed Private Equity Portfolio
- 3-year return (As of Oct. 31, 2021): 21.72%
- Expense ratio: 1.44%
- Assets under management (AUM as of Oct. 31, 2021): $285.2 million
- Inception date: 10/24/2006
The Invesco Global Listed Private Equity Portfolio ETF (PSP) is an ETF with 82 holdings that aims to invest at least 90% of its assets in businesses that focus on private equity investments. This includes business development companies (BDCs) that aim to purchase controlling shares of smaller firms and help them grow as well as companies involved in other aspects of private equity.
Over the past three years, the fund has performed slightly worse than the Red Rocks Global Listed Private Equity Index it tracks: 21.72% versus 22.41%. The fund’s one-year return, as of Oct. 31, 2021, was 65.50%.
The fund is the most expensive on our list with an expense ratio of 1.58%, which translates to $15.80 on an investment of $1,000. However, it’s the oldest fund on the list and has provided solid returns over the past three years, so investors don’t have to worry about the fund manager’s track record.
One risk to keep in mind is that the fund invests in American Depository Receipts of foreign companies, which can expose investors to things like currency fluctuations and other risks.
Exos SPAC Originated ETF
- 3-year return (As of Nov. 3, 2021): N/A
- Expense ratio: 1.00%
- Assets under management (AUM as of Nov. 3, 2021): $18.4 million
- Inception date: 01/26/2021
The Exos SPAC Originated ETF (SPXZ) from Morgan Creek is the newest ETF on the list, with an inception date of January 26, 2021. Since its inception, it has not performed well against its index (MSTAR): -29.44% versus 11.57%. The fund’s return since its inception was -29.48%, as of Sept. 30, 2021.
SPAC stands for “special-purpose acquisition company.” These businesses are shell corporations that are publicly traded. The goal of a SPAC is to acquire a private business, making it into a publicly-traded company without having to go through an IPO.
This ETF gives investors exposure to SPACs that are aiming to take private firms public. SPACs have some advantages compared to traditional IPOs but also face some of the same risks, such as the fact that smaller businesses are prone to failure.
None of the fund’s top-10 holdings are SPACs.
The fund’s expense ratio is 1.00%, which means you’ll pay $10 per $1,000 invested, and it includes 102 holdings.
This fund has $18.4 million in assets under management, which may make investors worry about the fund’s liquidity. It has also lost 29.48% since the fund was formed. However, it gives investors exposure to a unique asset class, so you may want to watch its future performance to see if it is a good investment for your needs.
iShares Listed Private Equity UCITS ETF
- 3-year return (As of Nov. 3, 2021): 25.36%
- Expense ratio: 0.75%
- Assets under management (AUM as of Nov. 3, 2021): $1.23 billion
- Inception date: 03/16/2007
The iShares Listed Private Equity UCITS ETF (IPRV) is a fund that invests in private equity companies across the developed world. It invests in many types of private equity companies, including Master-Limited Partnerships and other firms involved in private equity. IPRV has 87 holdings, and, and has performed slightly better than its benchmark in four of the past five years. Its one-year return was 59.55%, as of Sept. 30, 2021.
This is the least expensive fund on the list with an expense ratio of 0.75%, which would cost $7.50 for every $1,000 invested. It also has the most assets under its management, with more than $1 billion in its portfolio. That means that investors worried about costs and liquidity may like this fund.
VanEck BDC Income ETF
- 3-year return (As of Nov. 3, 2021): 11.02%
- Expense ratio: 10.07%
- Assets under management (AUM as of Nov. 3, 2021: $515.0 million
- Inception date: 02/11/2013
The VanEck BDC Income ETF (BIZD) is a unique private equity ETF with 25 holdings that looks to give investors income from their portfolio rather than focusing primarily on appreciation. The fund yields almost 8%, which is a huge amount compared to most other income-focused ETFs. Performance-wise, the fund has outperformed its index by 0.23% over the past three years. Its one-year return was 70.12%, as of Oct. 31, 2021.
The fund has a massive 10.07% expense ratio ($10.07 per $1,000 invested), though this number doesn’t tell the whole story. BIZD is a fund of funds and must report all the costs incurred by the funds included in the ETFs portfolio. The fund’s direct expenses are anticipated to be 0.41% ($4.10 per $1,000 invested) with the remaining costs being indirect expenses.
Pros and Cons of Investing in Private Equity ETFs
Exposure to a unique asset class
Private businesses often have huge growth potential
Few ETFs on the market
Many small companies fail
High management fees
- Exposure to a unique asset class: Most everyday investors don’t have access to private equity investments, so these ETFs give you a unique way to diversify your portfolio.
- Private businesses often have huge growth potential: Smaller, private companies often have more room to grow than larger established ones. Today’s big companies, like Apple, Facebook, and Google were all small private firms at one point.
- Few ETFs on the market: There are few options for investors to choose from. Not many ETF providers have funds focusing on private equity.
- Many small companies fail: Roughly 50% of startups with employees fail within five years. Private equity firms sometimes buy new businesses, which may mean a high risk of failure.
- High management fees: Private equity is an expensive business to be in and most of these ETFs are actively managed, meaning fees are high.
Historical Performance Trends
In the past, private equity tended to be more lucrative than investing in public companies. This increased return was offset by the increased difficulty and risk of private equity investments.
However, over the past decade, private-equity investment returns have become closer to the returns of investing in public businesses. There are many potential explanations for this, including government policy that has helped boost stock prices and global economic trends.
Some analysts believe that the high returns public companies have seen in recent years will be offset by lower returns in the future, giving private equity a chance to outperform again.
Investors will have to decide for themselves whether they think the historical trend of higher private equity returns will continue.
Is a Private Equity ETF Right for Me?
If you’re interested in investing in private equity, using a private equity ETF is one of the easier ways to invest because the cost-of-entry is low compared to the significant investment private equity firms typically require.
Private equity can be risky and have long time horizons, so make sure it fits with your goals and remember to only invest money you can afford to lose.
Frequently Asked Questions (FAQs)
How do private equity ETFs work?
Private equity ETFs work by investing in private equity companies, which focus on buying private companies and later selling those businesses for a profit.
How can I invest in private equity ETFs?
You can invest in a private equity ETF through your brokerage account. You’ll need to choose a broker, decide on which fund to buy, and place a buy order.
When should I buy private equity ETFs?
It’s difficult to time the market, so there’s no single answer to when is the right time to buy a private equity ETF. Keep in mind that these funds tend to have long investment horizons, so try to buy shares when you can weather volatility and can afford to hold them for a long time.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.