Different Take On Private Equity

Two new ETFs will target the private equity space by acting like private equity managers.

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%.

JPMorgan Debuts 2nd Hedge Fund ETF

J.P. Morgan is also rolling out an alternative investment type of fund that seeks to replicate a popular hedge fund strategy. The JPMorgan Event Driven ETF (JPED) is actively managed, and seeks to invest in companies likely to see their share prices affected by expected or scheduled events or situations.

JPED comes with an expense ratio of 0.85% and lists on the NYSE Arca.

The prospectus notes the methodology will seek to exploit event-driven sources of return that exhibit low correlations and have distinct risk/return profiles. Specifically, the fund will invest in companies that involve assuming a risk associated with a corporate event, or it will make an investment play on investors’ behavioral biases.

The fund will target the individual return factors embodied by merger arbitrage, activism tracking, share buybacks, spin-offs, index arbitrage and post-reorganization equities.

JPED takes a global perspective, and can invest in a wide range of securities, including derivatives as well as having the ability to take both long and short positions.

Although there are other event-driven ETF strategies, they do not have significant assets and are not actively managed. JPED will join the actively managed $154 million JPMorgan Diversified Alternatives ETF (JPHF), which is also actively managed and seeks to replicate a variety of hedge fund strategies, including event driven.

Contact Heather Bell at [email protected]