If you’ve been paying attention to CNBC… or just about any financial media outlet… private equity is the "it story" of 2007. And by "it story," I think many people are afraid to ask what "it" is!
In the broadest of broad sensibilities, the term refers to any type of equity ownership in an asset that does not trade on a public exchange. Hence we get the word, "private." And there are hundreds of firms whose principal business is to quietly invest in non-public, non-exchange-listed companies.
In essence, this is what many refer to as "venture capitalists." And the reason that VC/private equity has become the story that it has in 2007 is the fact that they have been gobbling up public companies and taking them private. The reason? Many seem to believe that there are big time profits to be made in buying up a corporation, delisting it, repackaging it and bringing one or more IPOs back to the public arena.
What about these VC or private equity firms makes them worthy of note? For one thing, they seem to have money… and lots of it. For another thing, many of them are public companies themselves. And so you can invest in the stock shares of public corporations whose business is to purchase private companies and/or turn public companies private.
Get it? Sort of? If nothing else, one can think of it this way. Imagine you and several partners wanted to buy a home, fix it up, and flip it for a profit. Well that’s the role of the private equity firm… buy it, fix it, flip it.
And right now, you can invest in an exchange-traded fund of 34 publicly-listed private equity companies. The investment, should you choose to accept it, is the PowerShares Listed Private Equity Fund (PSP). The investment seeks results that correspond to the price and yield performance, before fees and expenses, of the Red Rocks Listed Private Equity Index.
Good idea? Hard to say… and here’s why. On the one hand, the index of these VC/private equity companies has annualized at 20%+ for 10 years! That’s one heck of a ride! Moreover, financial firms (e.g., banks, brokerages, insurers) are some of the best performers historically, when they aren’t making bad loans in a real estate downturn.
On the other side of the coin, the fund itself is quite new. Very little is known about the volatility and risk associated with the PowerShares Listed Private Equity Fund (PSP). A 6-month look at this investment’s performance alongside the broad market benchmark (S&P 500’s SPY) appears to demonstrate that one might need to take more risk than the market to get the same returns as the market. And that’s not desirable.
If you’re going to take an interest in private equity, be sure that you have your wits about you. Decide on an appropriate plan for the conditions under which you might need to exit the PowerShares Listed Private Equity Fund (PSP).
Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.