Late October saw the debut of the Goldman Sachs MSCI World Private Equity Return Tracker, an exchange-traded fund designed to give investors private-equity-like returns by investing in publicly traded stocks.
The ETF is invested in around 2,000 public equities picked to mirror the region, sector and style exposure of the MSCI World Private Equity Return Tracker Index, a dataset of 9,700 private-equity funds and 174,000 private businesses. Unlike institutional private-equity funds, which typically charge a 2% management fee and give the fund manager a 20% share of profits, the ETF has a total expense ratio of .5%.
The array of private-market investment products targeting wealthy and affluent individuals has expanded significantly in recent years. Most are structured to allow investors to invest directly in private assets, whether acquiring equity through interval funds or issuing debt through business development companies. Brendan McCarthy, Goldman Sachs’ global head of ETF distribution, and Oliver Bunn, its head of quantitative investment strategies alternatives, spoke to PitchBook about why it took a liquid approach to providing illiquid-style exposure. The conversation was edited for clarity.
Why did you opt for a product that replicates private equity with public assets?
McCarthy: The ETF wrapper has changed the landscape for equity investing and fixed income. Private assets are the one area where the market is just starting to think about innovation, but we need to be really careful. Private assets are, by nature, illiquid, and the ETF wrapper is liquid, tradeable and transparent. You don’t want to put illiquid assets into a wrapper where they are not meant to be. We want to make sure investors are buying something where they know what’s inside of it, which is transparent and liquid in nature. But we also wanted to address the gap in the marketplace: the investor who can’t access true private equity, because maybe they can’t deal with lockup periods or complex due diligence. We want to give them a vehicle that at least gets them diversification and a return stream that is private-equity-like.
PE-style governance, hands-on management—private equity managers say these bring higher returns and use them to justify higher fees. If you can achieve PE-like returns using public stocks, doesn’t it blow a hole in the private-equity pitch?
McCarthy: MSCI built this index on the premise that there are two general drivers of returns for private equity. The skill of the general partner, their ability to find, operate and manage portfolio companies, is hard to replicate. Other things can be replicated. What region is the GP in? What sector? Stylistically, are they a growth or a value investor? Is this going to be disruptive? Yes. Can it replace private equity? No. That’s why we call it ‘private-equity-like.’ The returns should be somewhere between what you expect from private equity and public markets.
How is the portfolio constructed?
Bunn: The pure public market index is about 10% in the small-cap category. This [ETF] is a bit overweight to small caps relative to that, as private equity companies are [typically] smaller capitalization companies. You find private equity is overweight information technology, industrials and healthcare [compared with the public market] and it’s underweight financials, consumer discretionary and communication services.
If you think about classic public market investing, certain style factors play a role: value, quality, momentum. A buyout manager is trying to find companies that they believe are underappreciated by the market but have solid fundamentals. That’s a value-quality story. Venture capital is finding hot companies with really interesting growth characteristics. That’s growth-momentum.
We hold about 2,000 securities in the ETF. About 1,500 are long, 500 are short. That’s the style exposures: value, quality, growth, momentum. To precisely capture that, you want to implement it in the public market space via a long-short portfolio. That’s not a perspective on the stock-picking ability of the private equity universe. It’s a factor representation of how the exposures come to be.
Do you envisage a time when trackers come to account for all the market beta of a private-equity portfolio, with outperformance coming from active management?
McCarthy: That evolution wouldn’t surprise me, because we’ve seen it in other asset classes and we’ve seen that’s how investors operate today—pairing active and index together. People use index products, forms of beta, for the core of their portfolio, and they use active management for satellite positions. We don’t yet have an index in private assets. Are these investible indexes evolving as a form of beta? I think the story is around the index providers. We talk about an arms race that’s happening for this type of data, to make it transparent, to capture it and to make a benchmark. There are a million use cases for it.
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