Different Take On Private Equity

December 01, 2017

USCF Investments is rolling out two private-equity ETFs today that offer an entirely different take on the space.

Rather than investing in publicly listed private equity firms, the USCF SummerHaven SHPEI Index Fund (BUY) and the USCF SummerHaven SHPEN Index Fund (BUYN) track indexes that target companies that have similar characteristics to those that have already been selected by private-equity firms for investment, or those companies that have characteristics that mean they are likely to be selected for such investment in the future.

Both funds come with expense ratios of 0.95% and list on the NYSE Arca.

According to John Love, USCF president and CEO, the indexes underlying the funds take their premise from research by Erik Stafford, a professor of business administration at Harvard Business School.

“You can basically get private equitylike returns over the long term by investing in public equities, and obviously do so at a much better price point,” Love said of the research’s findings.

He describes the USCF funds as “first-of-their-kind” products, and notes that funds that invest in private-equity firms won’t provide the same return streams as actual private equity.

Methodology

The primary difference between the two ETFs is the fact that BUY focuses on the broad private-equity environment, while BUYN focuses on private-equity targets in the natural resources space. Both indexes are equally weighted, and select microcap- to midcap-sized U.S.-listed companies with at least $100 million and less than $10 billion in market capitalization.

Although there are a number of subgroups to private equity that USCF could have gone with, Love says the natural resources space represented the best opportunity set.

BUY’s index generally includes at least 200 companies, while BUYN’s includes at least 80. BUYN’s index selects natural resources companies from the broad energy sector and from specific industry groups within the materials, industrials, consumer discretionary and consumer staples sectors.

“We’re opening up a corner of the investment landscape that previously had high barriers to enter,” Love said, noting the high costs and illiquidity of traditional private equity, which is typically only available to high net worth investors.

Currently, the VanEck Vectors BDC Income ETF (BIZD) is the only U.S. ETF focused on private equity, and it invests in business development companies. It has $182 million in assets under management and rolled out in 2013. The fund comes with a hefty expense ratio of 9.67%.

The PowerShares Global Listed Private Equity Portfolio (PSP) similarly invests in private-equity firms, but at the global level. It has $320 million in assets under management and launched in 2006. Its expense ratio is 2.22%.

 

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