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Private Equity Comes to the Masses

Katie Benner

Private financiers and multibillion-dollar private mega-deals are hogging the market spotlight, and retail investors can soon get in the game with an exchange-traded fund tracking private equity investments.

ETF provider PowerShares has a slate of 40 ETFs under registration, including the PowerShares Listed Private Equity Portfolio ETF, which is expected to hit the American Stock Exchange in mid-October.

The ETF will track a private equity index that was recently created by Denver investment adviser Red Rocks Capital Partners. The new index is a benchmark of about 30 publicly traded companies that invest in businesses that participate in private equity, including private equity firms, business development companies and banks that put the lion's share of their capital into private companies.

"This is an asset class that people wake up every day and hear about ... clearly it is now part of the business vernacular of both retail investors who better understand what private equity is about and of financial consultants and high-net worth folks who don't have access to the partnerships they would need to access this asset class," says Mark Sunderhuse, managing partner and co-founder of Red Rock Capital Partners.

Private equity firms have been grabbing an increasing amount of headlines as the size of buyout deals escalates. This summer saw hospital company HCA(HCA Quote - Cramer on HCA - Stock Picks) agree to a record-setting $33 billion private equity buyout. Most recently, Freescale Semiconductor (FSL Quote - Cramer on FSL - Stock Picks) was rumored this week to be targeted for a $16 billion private equity takeover, which would eclipse SunGard Data Systems as the biggest tech going-private deal.

But the average investor can't access private equity firms. Most stipulate that investors be accredited, meaning that they have a net worth of at least a million dollars. In addition, they often require investors to keep their money invested for long periods of time.

But ETFs can be traded just like a stock, eliminating the problem of liquidity, and any retail investor, no matter their net worth, has access to the product.

"The whole idea is to bring private equity to the masses," Sunderhuse says.

Unlike private-equity funds, which offer little transparency into their holdings, ETF investors will know what they're buying.

Moreover, the components of the index that the ETF will track are all publicly traded companies, so their prices are set by the market. Private companies in and of themselves would be nearly impossible to price once daily, much less throughout the day like a stock.

The ETF's overall expense ratio will be capped at 0.60%.

Index Breakdown

For a stock to make the Listed Private Equity Index, it must have a majority of its assets invested in or exposed to private companies, domestic or foreign, and have a market cap of at least $50 million.

The companies are diversified by stage, from early-stage venture capital to late-stage recaps, mezzanine financing and debt offerings, as well as by industry and sub-industry.

Red Rock says it won't divulge the initial components of the index until the Amex publishes the Listed Private Equity Index, expected by the end of September.

Adam Goldman, Red Rock co-founder and managing partner, emphasizes that the index will not leave out a sector or a subsector. It will include publishing, leisure, retail, biopharma, aerospace, materials and health care, though it will change as the portfolio is rebalanced.

"The index, even though it only has 30 or so names, will represent well over 1,000 different investments," says Sunderhuse.