ETFs maintain coming for personal markets | USAEMALL.com

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Long before BlackRock bought Preqin this summer, the race to bring index funds to private markets was already on. But Larry Fink made it very public in his subsequent earnings call with analysts:

I think it’s fairly remarkable when you think about the public markets, you think about this symbiotic relationship that risk models and indexes and data have done to create public market indexing, benchmarking, asset allocation. All of those opportunities are ahead of us in the private markets by bringing together risk models, benchmarks and investable indices.

We think this opportunity to index the private markets is really one of the most attractive that we’ve had in the history of BlackRock.

We’ve already highlighted Apollo’s interesting deal with State Street to launch a not-quite but kinda private credit ETF. Invesco’s already got a private equity ETF (albeit one that just invests in listed PE stocks, MLPs and business development companies).

Last year NewVest launched an index fund that invests in actual private equity funds (though you could just call that a fund-of-funds). And then there’s ARK, which we guess kinda looks like a VC ETF if you’re drunk and squint a little.

But there’s clearly more ambitious stuff in the pipeline, from both whales like BlackRock and ETF industry minnows. After all, if you can really package up privates in a non-terrible way (that’s a big caveat though) and sell them to retail investors, the opportunities are huge. So what Morningstar’s Ben Johnson once dubbed the ETF industry’s “spaghetti cannon” keeps shooting at the wall and seeing what sticks.

Which is why this October 2 SEC filing from Pacer ETFs is interesting (HT Morningstar’s Jeffrey Ptak). In addition to a “Cash Cows Bond ETF” and a “Future of Warfare ETF”, Pacer wants to launch a PE/VC ETF, based on a FTSE index of the same name. From the filing:

The Index is a rules-based index that aims to provide exposure to a portfolio that mimics the returns of a theoretical investment in a diversified pool of private equity and venture capital-backed companies. The Index is comprised of varying weights to the FTSE Private Equity Buyout Index (the “Buyout Index”) and the FTSE Venture Capital Index (the “VC Index”).

The Buyout Index weight will be set at a range of 50% to 95%, with the balance allocated to the VC Index. The Index’s relative weights to the Buyout Index and VC Index are determined at each calendar month-end based on optimal relative weighting over recent time periods. The Index is calculated and published daily.

In other words, this won’t be a TRUE private markets ETF. It will actually invest in listed companies that walk, talk and quack vaguely similarly to private equity and venture capital investments.

FTSE does this by collecting non-public transactions by PE and VC funds — ie whenever they buy or sell a stake in a company — calculating an index from that, and then finding a combination of public securities that reflect it as closely as possible.

As the full methodology for the PE version puts it:

The FTSE PE Buyout Research Index tracks the performance of private equity-owned firms across a number of economic sectors. Each private equity-backed firm in the FTSE PE Buyout Research Index is mapped to a LSEG sector. These firms collectively make up the private equity buyout universe. The penultimate result of the FTSE PE Buyout Research Index computation is a list of the estimated values of each private equity portfolio firm in each month.

The approach of the FTSE PE Buyout Index is to combine, with appropriate weights, sector portfolio returns, each of which seeks to mimic return characteristics of the private equity firms in each economic sector in the private equity universe and, jointly, to capture the risk/reward characteristics of private equity as an asset class. The sector portfolios hold liquid exchange traded instruments.

Using these firm weights from the FTSE PE Buyout Research Index, we can compute the weight of each sector in the private equity universe. These weights are used in determining the final weights applied to the portfolios in order to create the final FTSE PE Buyout Index.

It’s an imperfect way of doing this. It’s obviously just PE and VC replication rather than actually indexing private markets — a replica Hermés handbag rather than the real deal.

The indices have a track record though (they were formerly known as the Refinitiv VC and PE indices, and were started in 2012 and 2014 respectively), and FTSE obviously knows its index construction. Here are the latest factsheets for the PE index and the VC index.

In chart form, here’s what the PE index looks like versus the Cambridge PE index and the Russell 2000:

(zoomable version)

And here’s the VC index, versus Cambridge’s VC index and the Nasdaq:

(zoomable version)

Will it work? Hard to say. The fees will be interesting, but none are listed in the provisional filing. At least the return profile look less awful than those of the hedge fund index State Street is also shoving into an ETF.

However, the returns are a lot more volatile than real private equity and venture capital indices, which negates one of the main unspoken selling points of private markets.

And to FTAV’s eyes, the indices just look like leveraged investments in the Nasdaq or Russell indices. This might be an honest approximation of what private equity does, but is probably not what investors are hoping for.