I'm not sure why I should care about investing in private equity, but I know it must be important because the financial media tells us it is.So, to offer private equity to the masses, PowerShares issued the Listed Private Equity Portfolio (PSP). The fund will own more than 30 companies that are involved one way or another with private equity, corresponding to the Red Rocks Listed Private Equity Index.
Taking a Closer LookBefore this article, I hadn't examined any of the listed "private equity" stocks. They offer some interesting secondary effects. They have low correlations to the market, as noted earlier, and very high yields: KKR Financial at 7.5%, Allied Capital at 8.0% and Apollo at 9.1%. I've written several articles about stocks with low correlation, high yields and low volatilities. These stocks offer two out of three, but the volatility is high. All three have standard deviations that are much higher than the S&P 500. From here, I'm inclined to explore what utility there might be in the fund, even if the private equity aspect is less than ideal.
As with every ETF, so it seems, the back-test of the index is compelling. The chart appears to show some correlation to the Russell 2000. The fund is actually heaviest in mid-cap value, 30.86%, so a comparison to that part of the market might have been more useful. It also has a high yield. Although not on the information sheet at the PowerShares Web site, I called the company and was told that it yields 4.35%. If there is utility with this fund, it would be as a tool to reduce cap size, increase volatility, have a lower correlation to the broad market and add some yield. On paper, this doesn't seem so bad, but you can decide for yourself if this will be the best possible way to do all those things for your portfolio.