INTERVIEW: A New Way To Enter Private Equity - The Index Route

Tom Burroughes

8 June 2017

For some time now, there has been broadly two ways for an investor to get access to private equity. One route is to become a limited partner of a fund and hope to obtain a seat at the table. The other is to buy shares in a listed fund.

Both routes have their upsides and downsides. With conventional private equity, the trick is being able to find the star performers and put a foot through the door before all the big institutional money gets to the front of the queue. During periods when funds have more money than they can quickly deploy, getting access into the strongest names is difficult. The stars can be really choosy about whom they want to let in past the roped entrance. On the other side, listed funds are clearly simple to participate in - you just buy their shares - but with closed-ended funds, there is always a risk that the fund’s shares can trade at a discount to the underlying value of the fund if, for example, the underlying assets are seen as being particularly illiquid, or if the manager falls out of favor with investors, or if share prices are hit by a wider market disturbance. Such a NAV discount can represent a buying opportunity, but persistent discounts can be unnerving and some trusts have share buyback or liquidation policies to contain the issue.

What might be a solution? Is there a “third way” to enter private equity? Well, some number crunchers at Chicago-headquartered like that,” Knupp said.

Such indices are not full replacements for direct private equity but are useful additions to the wealthy investor’s toolbox, he said.

Another value of an investible index - which can form the basis of an exchange traded fund or some sort of note, Bushonville said, is that it is a relatively low-cost way of gaining access to private equity, particularly for novices or those who are nervous about the liquidity constraints and investment time horizons that come with traditional private equity.

In using an investable index, he said, there is no need for investors to worry about “vintages” or the “J-curve” shape of commitments/returns in an individual private equity investment, he added.