Wall Street is still awaiting regulatory approval for the first full-blown private-asset ETFs, but for now opportunistic issuers are continuing to churn out products that claim to replicate the booming asset class — and stretching the definition of “liquid private equity.”
The movement to debut private-asset ETFs gained momentum last year after Apollo Global Management and State Street Global Advisors filed for a fund that would directly hold private credit investments. Regulators are still considering whether — and how — such a product would be allowed to function given that the underlying instruments are inherently hard to trade.
In the meantime, though, a handful of ETF issuers have attempted to take advantage of the appetite for such products with new exchange-traded funds that mimic private equity exposure by, for instance, investing in small-cap stocks of companies that are similar to those in buyout vehicles or emulating PE firms’ investment approach.
To be clear, none of the new funds claim direct PE investments, but rather a rough approximation of them. To some market-watchers, that undercuts the spirit of what private equity investments are supposed to provide.
“We can’t help but think of these recent launches as Bud Light for PE: watered down and not the real thing, like a true private equity fund,” said Todd Sohn, senior ETF strategist at Strategas.
Still, the new funds — from the PEO AlphaQuest Thematic PE ETF (ticker LQPE, i.e. “liquid PE”) to the Man Buyout Beta Index ETF (BUYO) and Pacer’s PE/VC ETF (PEVC) — may appeal to some retail investors who otherwise would have narrow avenues of access or exposure to private markets.
Wall Street is on a race to demystify the world of private markets amid growing demand among mainstream investors to diversify into the asset class on the promise of elevated returns with muted volatility. Yet reliable and timely data on everything from company revenues and debt is hard to find — if at all — because private companies don’t have the same disclosure requirements as their listed peers, while valuations are updated infrequently and often at the discretion of the fund manager. All that makes it harder for a growing band of market participants – ETF firms, quants and alternative data providers — gunning to replicate the industry’s performance.
One key reason that fully-fledged private-asset ETFs have yet to launch in the U.S. is that regulations only allow open-ended funds to have 15% of their holdings in illiquid assets, and most private instruments fit that bill. Apollo and State Street are seeking to work around those strictures by employing a novel trading strategy for their credit fund, which is now under review.
The private asset-themed ETFs take different approaches. Some, like BUYO and LQPE, offer indirect or synthetic exposure based on an index or theoretical investment approach similar to that of a buyout firm. Others, like the WHITEWOLF Publicly Listed Private Equity ETF (LBO), which launched in 2023, hold publicly traded stocks of companies involved in the private-markets space, like KKR & Co. Still others hold private assets capped at the current 15% limit.
One recent standout in the last category has been the ERShares Private-Public Crossover ETF (XOVR), which has had year-to-date inflows of $130 million amid the revelation that it’s been buying shares of Elon Musk’s SpaceX. Shares of the rocket-and-satellite company don’t trade on a stock exchange, making investing in the company difficult. The ETF’s inflows suggest there’s strong investor demand — especially from the retail crowd — for direct private-asset exposure, said Bloomberg Intelligence’s Athanasios Psarofagis.
“Clearly investors want something that actually holds private companies, and XOVR does that the closest, even though it’s not fully private,” he said. Otherwise, many might just be “waiting for the real thing, if it ever happens.”
