I am retired and take educated guesses on all things financial.

January 29, 2008

January 30, 2008: Down, but not out: PowerShares International Listed Private Equity Portfolio

On occasion, a relatively obscure, poorly performing fund may contain the seeds of success over the long term. We all know the old saying "every investment has its season". This ETF has been stuck in a monsoon-created mudslide since its inception in September of 2007,sinking a little deeper without respite. That may be about to change.

PowerShares' International Listed Private Equity Portfolio (PFP) has as its objective to invest 90% of total assets in stocks that comprise the International Listed Private Equity Index and American Depository Receipts based upon the stocks in the International Listed Private Equity Index. The fund also will invest at least 80% of its total assets in publicly listed companies that invest in or lend capital to privately held companies.

PFP has wide latitude in the selection of companies and investment objectives. Diversification for this fund means that the portfolio may hold exposure to companies that include the early, mid and/or late consolidated stage of investment, sector investing and/or geography. Companies may include publicly traded limited partnership interests, investment holding companies, special purpose acquisition corporations, publicly traded venture capital funds, closed-end funds, ADRs, financial institutions that lend or invest in private companies, REITs, and "any other vehicle whose primary purpose is to invest in privately held companies"(Prospectus).

The Index for this fund was developed by Red Rocks Capital in February 2007 and is, as titled, international in scope. As with most ETFs, back testing data make it look stunning in comparison with competitive indexes. The reality is that this thinly-traded fund since inception has performed poorly. However, examining the contents of PFP as it presently exists exposes lucrative securities that may bode well for investors with speculative cash in need of a fund.

PFP, with approximately $14.5m in assets trades at this writing at $21.06.The fund has 37 holdings, a price to book of 1.26, a PE of 12.01 and an assumptive ROE of 15.75%. It trades in line with net asset value at present.

Why is this fund attractive? I believe it is now in the sweet spot for sector performance internationally, currency risk is mitigated and the geographical placement of the fund parts are well-positioned to withstand a mild recession and propel forward faster than more mundane funds with emphasis on financials able to buy distressed assets in the cheap, infrastructure investments worldwide providing excellent cash flow for decades and infrastructure investments in target areas (Asia and the Middle East) providing immediate profits through management and construction contracts.

Significant companies in the portfolio include Eurazeo, Jafco Ltd.,3iGroup PLC, Wendel, Macquarie Infrastructure, Macquarie Airports, Babcock and Brown Infrastructure Group,GIMV N.V.,International Capital Group PLC, KKR Private Equity Investors and RHJ International SA.

The stated expense ratio is .75%. The unstated expenses are the sometimes outrageous fees baked into private equity companies and the deals they concoct. That said, this fund may just be in the right place, at the right time, for the right investor.


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