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Summary This Global Listed Private Equity Portfolio is under the radar with little institutional ownership. With an easy to analyze portfolio of 64 holdings we are slightly surprised by the lack of “buzz”. We analyze this attractive performing ETF, notice a similarity with MLPs that outperform when rates rise, and provide our recommendation. The PowerShares Global Listed Private Equity Portfolio ETF (NYSEARCA: PSP ), is a well established fund, (inception 10/24/2006) with an attractive track record. It had a serious correction during the financial crises but has weathered the storm and come back significantly, similar to the holdings of the underlying components. The ETF is based upon an index called the Red Rocks Global Listed Private Equity Index. Red Rocks Capital is an asset management firm based in Golden, Colorado. Red Rocks specializes in listed private equity securities. They are owned by ALPS, a mutual fund and asset servicing and gathering firm based in Denver, Co. They are in turn a wholly owned subsidiary of DST Systems (NYSE: DST ), a software development firm based in Kansas City, Missouri. The ETF presently has 64 holdings while the index with a ticker symbol of GLPEXUTR has anywhere from 62-70 or an unknown number of holdings. We will explain why shortly. According to the sponsor PowerShares: The PowerShares Global Listed Private Equity Portfolio is based on the Red Rocks Global Listed Private Equity Index. The Fund will normally invest at least 90% of its total assets in securities, which may include American depository receipts and global depository receipts, that comprise the Index. The Index includes securities, ADRs and GDRs of 40 to 75 private equity companies, including business development companies BDCS, master limited partnerships MLPS and other vehicles whose principal business is to invest in, lend capital to or provide services to privately held companies (collectively, listed private equity companies). The Fund and the Index are rebalanced and reconstituted quarterly. The market cap and style allocations are interesting but not terribly relevant. For information purposes here are the allocations, courtesy of the fund sponsor, Invesco: PSP Market Cap & Style Allocations Classifications Weight Small-Cap = 27.49% Growth 2.44% Blend 3.28% Value 21.77% Mid-Cap = 56.70% Growth 27.60% Blend 16.78% Value 12.32% Large-Cap = 15.81% Growth 8.13% Blend 7.03% Value 0.65% There are no great surprises here as we expected that most of the constituents to this ETF would be solidly in a mid-cap structure. The general nature of most BDCs, MLPs and private equity firms for both tax and overall structure are neither extremely large, nor small. As a comparison, Morningstar breaks the allocation down slightly more: Micro-cap: 13.41%, Small-Cap: 14.08%, Medium-Cap: 56.70%, Large: 8.78%, and Giant: 7.03%. Obviously, they use a slightly different nomenclature and breakdown, but both Morningstar and the fund sponsor do concur exactly on the category of Medium or Mid-Cap. In terms of the style overall it is categorically a blend style with XTF.com breaking it down as follows: Blend, 81.10%, Growth, 9.50%, Value 6.50% and Pure Growth at 2.70% As this is a global fund, it is important to analyze the country and currency allocations of the holdings. PSP Country and Currency Allocations Country Weight Currency Weight United States 40.06% United States Dollar 40.06% United Kingdom 15.21% Euro 16.00% France 7.13% British Pound 15.21% Canada 6.02% Canadian Dollar 6.02% Switzerland 5.66% Swiss Franc 5.66% China 5.63% China Renminbi 5.63% South Africa 4.28% South Africa Rand 4.28% Belgium 3.95% NA NA Germany 3.28% NA NA Sweden 3.15% Swedish Krona 3.15% Japan 2.46% Japan Yen 2.46% Denmark 1.03% Danish Krone 1.03% Malta 1.64% NA NA Hong Kong 0.50% Hong Kong Dollar 0.50% As a global ETF this would be considered well balanced geographically with approximately 46.00% in North America and approximately 41% in the Europe. Geographically, the holdings shifted slightly from the last quarter, with a small percentage of assets moving to South Africa out of Malta. In terms of currency exposure, we don’t see the as a major influence on this ETF with the slight exception of weakness in China and continued weakness in the euro. In any event, the ETF is priced in dollars and the exposure, though unhedged, is fairly balanced. The U.S. dollar as the underlying currency at 40% and the other currencies make up an interesting mix overall. Any further concern is not directed at the currencies in this ETF, though it would be prudent of course to follow the euro based holdings and the small exposure to China. Our sector allocation of this ETF is related to the overall nature of private equity firms in general. For informational purposes here is the sector allocation: PSP Sector Allocations Sector Weight Financials 74.64% Derivatives 8.80% Industrials 8.27% Information Technology 4.89% Health Care 1.18% Investment Companies 1.11% Consumer Staples 1.03% Energy 0.08% The majority of the BDCs, MLPs, and private equity firms would be classified within the Financial Sector. Although a little difficult and subject to error, an analysis of the underlying industries is informative when we analyze a private equity firm and it components. In terms of PSP, it does shed light on the business nature of the holdings. PSP Industry Allocations Industry Exposure Weight Consumer Finance 59.70% Financial Services 22.70% Internet & Mobile Applications 4.70% Heavy Machinery 3.90% Steel 3.30% Other 2.20% Packaged Food Products 1.20% Health Care Providers & Services 0.90% Energy Equipment & Services 0.70% Investment Companies 0.60% This industry breakdown is courtesy of xtf.com and is subject to revision. As noted, many of the private equity, BDCs and MLPs within this ETF are focused on providing financing for other businesses and industries yet the underlying holdings can focus on specific industries as well. Investors who have never invested in these companies or analyzed these holdings may require a “learning curve” to understand how the firms are structured and the benefit of their overall tax structure. There is also history on their side, if and when, rates do increase. We will explain that shortly. Before doing so we will as usual analyze the top 15 components. For information purposes here are the top 15 components, their symbol, sector, ratings, (if any) and their weightings: PSP top 15 components Name/Symbol Sector Ratings (Moody’s/S&P) Weight Partners Group Holding AG ( OTCPK:PGPHF ) Financials NR/NR 5.661% 3i Group PLC ( OTCPK:TGOPY ) Financials NR/BBB 5.422% Onex Corp ( OTCPK:ONEXF ) Financials NR/NR 5.363% Fosun International Ltd ( OTCPK:FOSUY ) Industrials Ba3/BB 5.130% Citi KKR & Co, TRS 10/31/13/NA Derivatives NA/NA 4.505% Citi Blackstone TRS 10/31/13 Asset LG/NA Derivatives NA/NA 4.293% Eurazeo SA ( OTC:EUZOF ) Financials NR/NR 3.693% Brait SE/BAT.J Financials NR/NR 3.606% Leucadia National Corp (NYSE: LUK ) Financials Ba1/BBB- 3.287% Melrose Industries PLC ( OTC:MLSPY ) Industrials NR/NR 3.140% IAC/InterActive Corp (NASDAQ: IACI ) Information Technology Ba2/BB 2.981% Ares Capital Corp (NASDAQ: ARCC ) Financials Ba1/BBB 2.967% Ackermans & van Haaren NV ( OTCPK:AVHNY ) Financials NR/NR 2.924% Wendel SA ( OTCPK:WNDLF ) Financials NR/BBB- 2.914% Jafco Co Ltd ( OTC:JAFCY ) Financials NR/NR 2.461% Our top 15 holdings represent 58.347% of the ETF, while the balance of 49 holdings represent 41.653%. This is quite a top heavy ETF with 8.798%, (or 15.078% of the top 15) of the ETF in combined total return swaps that originated with Citi (NYSE: C ) and KKR (NYSE: KKR ) and Citi and Blackstone (NYSE: BX ). Basically, these swaps allow the ETF fund managers to utilize capital more effectively. A little tutorial on TRS is necessary. These swaps allow the ETF and its fund shareholders to receive a total return and gain exposure and benefit in the sector without actually having ownership. Income is also generated from the swap as well as appreciation of the asset over the life of the swap. A set rate is paid for the swap and if the asset does fall over the swap’s lifespan, the total return receiver or counterparty will be required to pay the asset owner the amount by which the asset has fallen in price. These Citi/KKR and Citi/Blackstone TRS are considered unrated derivative contracts. In terms of the company names, most of the names are only slightly “household names,” but fairly well known in professional investment circles. Many of the companies would be considered “holding companies,” due to their structures by ratings agencies in spite of the fact they would be classified as PE funds and BDCs. One of the top ten is Brait SE, whose name is derived from an uncut diamond. It is a Luxembourg and Johannesburg Exchange listed large South Africa based PE fund with no U.S. symbol whatsoever. Many of the companies in the index are listed on the “Pink sheets.” The primary reason is there are limited financial disclosures and reporting requirements. Yet the public vehicle is useful for both compensation plans and for retail participation in the sector, as long as proper risk disclosures occur. In our past analysis of ETFs we always provided the weighting of the index constituents. The purpose is to discern any discrepancies or variances in the current market between the index and the fund. This is also known of course by the term “tracking error.” Usually we can at least provide somewhat up to date information. BarCap, S&P, MS, and even small providers were more than happy to share their index composition with readers of Seeking Alpha. In this case, we were unsuccessful. One of the VP’s in Portfolio Strategy stated: I cannot provide any more information. There are some regulatory changes that are affecting how we report index information, so this has delayed the update of our fact sheet. There is an updated (9/30) fact sheet that is undergoing compliance review, but this may not be available for another 1-2 weeks. We are obviously slightly disheartened here. The only thing we can reference that pertains to what he is referring to was a new regulatory issue that pertains to shares in ETFs noted in a Reuters article and other investment publications. According to the article: ETFs are typically funds whose holdings are meant to mimic the performance of an index. To do that, the SEC has said the securities used to create shares in most funds must be the same ones as in the fund’s portfolio unless there was a change in the index the fund tracks. In any event, this seems more pertinent to Invesco than the index provider. We welcome SEC attorneys or fund practitioners to share further information. We felt his feedback was quite uncommon and obviously not transparent for an index provider. Overall, this is a little circumspect and disheartening. We like to inform the readers of any divergence or tracking errors from the index. In this case all we had to work with is data that “stale dated” from June information that basically shows the top ten holdings with no weightings whatsoever. Fortunately, the ETF fund information was up to date and an analysis for the top 15 holdings was possible. As noted, ratings on these issues are not prevalent and actually not pertinent. Only 14.59% from the top 15 or 25% have investment grade ratings. The reason is due to the structure of the firms in this ETF. Many of them do not have strong balance sheets. Some have substantial debt, including high yield paper. This does not endear or permit, in most cases an investment grade credit rating. In addition, many of these public firms see no need to apply for a rating as they basically borrow and lend and invest in the private markets using alternative sources of capital. In general, they have no use for credit ratings in their overall business model. By the way, the 16th holding is the well known Apollo global Management with 2.241%, and the Carlyle Group comes in at 22nd with 1.608% of the ETF. Overall, the benefit of the ETF holder is to participate in an alternative market that may be the place for stable cash flow and growth, if and when rates rise. We will explain this aspect shortly as we review the performance and key data of the ETF. PSP’s Performance, Fees and Recommendation Category PSP ETF GLPEXUTR Index Net Expense Ratio 2.09% NA Turnover Ratio 30.00% NA YTD Return 5.49% (10/31/15) 5.71% (10/31/15) 1-Year Total Return 6.42% (10/31/15) 7.97% (10/31/15) Distribution Yield/SEC Yield 8.04%/3.27%(11/18/15) 3.86%/NA (06/30/15) Beta,(3 year) Shares/Holdings (shares vs Morningstar Global Allocation TR USD) 1.66/1.1 NA/NA P/E Ratio FY1/current 13.93/12.65 (09/30/15) NA/NA Price/Book Ratio FY1/current 1.78/1.71 (09/30/15) NA/NA The fees here are basically standard in PE and BDCs ETFs. 1.45% of the 2.09% of the fees are the pro rated portion of the cumulative expenses that are charged by the underlying holdings. It is the usual large fees that are expected in this alternative sector. This is in spite of the fact that Fidelity uses a rather small number of 0.53% for the net expense ratio for the asset class median. The turnover ratio of 30% is also higher than the asset class median of 18.00%. We attribute this to changes in the ETF and the underlying index throughout the year. The YTD return is almost 2xs the S&P 500 return (2.65%) and exceeds the 12 month return as well (5.20%). The beta for the underlying is close to the benchmark and is attributed to the lack of volatility of the publicly traded shares and general long term nature of PE holdings. The biggest issue with this ETF is the distribution yield. The returns generated here are considered neither short term nor long term capital gains, but dividend income. If the PE funds in PSP, even though public listings, are structured as MLP’s (Master Limited Partnerships) this creates a tax issue. The funds themselves as a MLP have a tax incentive to distribute most nearly all their profits to their shareholders. This creates major tax issues for investors in MLPs. Fortunately, the majority of the firms in the ETF are structured under a holding company or owners of a MLP. This allows these profits to flow as dividend income and not as capital gains. We mentioned in the beginning why we are encouraged by market moves in these firms during a rate rise. Though the underlying companies are not, for the most part structured as MLPs they do tend to trade at times like them and investors due at times “bucket” them, BDC’s, and listed PE funds all together. This fund as we mentioned, only dates as to 2006, so we can not ascertain how it will do overall during a rate increase. We looked into the history of MLP’s and noticed an interesting article. Fortune Magazine’s, November 01, 2015, stated: They also find encouragement in recent history: The last time the Fed increased rates, between June 2004 and June 2006, the S&P MLP index rose 17%, beating the S&P 500’s 12% gain. Yes, we know this article is primarily on pipeline MLPs but does address MLPs in general. The main takeaway on this article is that the companies did not contract during an interest rate increase. It actually is logical. The underlying holdings are based upon companies that are either being restructured, turned around, purchased for resale, or merged with other entities. During periods of interest rate increases general aggregate demand increases. In general, the Fed Reserve and other central banks try to stay ahead of demand and inflation. Granted, this is a global PE ETF with 40.00% in the U.S., but in general the U.S. economy will globally lead the way forward. In the event of no interest rates due to a myriad of reasons, we expect this ETF to continue to perform and return an above market return to investors. Overall, we are extremely bullish on the sector and this ETF and recommend a buy as an alternative investment. We are encouraged by the growth of the underlying holdings within the fund constituents. It is one of the few vehicles in the market where both institutions and individuals can invest in a PE or BDC fund, albeit in an indirect way. The ETF closed at $10.88 per share on November 19. Its year high was $12.41, set on June 03 and its year low of $9.01 was on August 24. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Scalper1 News
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