Prequin’s latest newsletter “Preqin Private Equity Benchmarks, Q1 2013,” contains information about an innovative ETF that delivers PE-type returns.

Private equity returns made liquid

A large section of investors have been attracted to the high returns obtainable from private equity (PE) but have hesitated because of the comparative illiquidity of this investment avenue.

Preqin make the point that on a long-term basis, private equity has delivered returns up to 400 bp higher than the public markets. The objective was to bring these returns within reach of the ordinary investor – how better than an ETF?

Nomura Modelled PERI

The Source Nomura Modelled PERI UCITS ETF is a London Stock Exchange listed vehicle that requires a much lower investment amount and most importantly, can be traded every day. Matthew Peakman, Managing Director, Head of Fund Derivatives Trading at Nomura, said on its launch: “Private equity has consistently delivered greater returns than many other asset classes. However, certain characteristics of the market, including long lock-up periods, a lack of transparency and large minimum investments are drawbacks for many investors. PERI targets private equity-type returns, but in a transparent, liquid and cost efficient manner.”

Methodology

Quant house QES used Preqin’s comprehensive database on PE returns and buyout deals and created algorithms that would replicate the typical buyout fund return through the medium of cash and highly liquid S&P sector indices. Investment bank Nomura uses these algorithms to set up the Nomura QES Modelled Private Equity Returns Index (Net) (PERI).

The Source Nomura Modelled PERI UCITS ETF, mentioned above, links to this index and offers investors a liquid and daily tradable vehicle that mimics PE returns.

Prospects

Preqin estimated that PE ‘dry powder’ or capital pending investment could be as high as $366B (May 2013) on a global basis. The North American Private Equity Buyout funds alone are sitting on a mountain of cash estimated at $187B. These funds could be put to work through the new ETF, as well as through similar new products in the pipeline.

Investment amount and costs

The fund is denominated in the USD and the minimum investible amount is one share.

The cost structure is (a) an annual management fee of 0.3%, (b) index fee of 1% per annum, (c) transaction costs of 0.05% and 0.40% per annum as implementation costs.

1-PERI-GRAPH private equity