Private equity may be the next frontier for the exchange-traded-fund industry, thirty years after the first U.S.-listed ETF was launched, according to Sue Thompson, head of Americas distribution for SPDR ETFs at State Street Global Advisors.
During a discussion panel Tuesday evening celebrating the 30th anniversary of the “SPY” ETF at the Mandarin Oriental hotel in New York, Thompson said that she’d like to see the democratization of private equity in the ETF market. The panel considered what future innovation may be in store for the ETF market following the SPY revolution.
The SPDR S&P 500 ETF Trust, which trades under the ticker SPY, was launched in January 1993 and sparked the creation of the ETF market in the U.S. The fund became a trading tool for sophisticated institutional investors as well as a way for individual investors to gain broad exposure to the U.S. stock market.
Meanwhile, the pool of companies listed in the stock market has shrunk and the private-equity industry has expanded, said Thompson. Bringing the investment structure traditionally used in private markets to publicly-listed ETFs isn’t easy, but that doesn’t mean innovators in the industry shouldn’t try, she said.
Private-equity firms raise funds to buy companies and aim to sell those businesses, or take them public, at a profit down the road. The industry is known for leveraged buyouts of companies, deals that are financed partly with debt, although firms may also provide growth equity to businesses.
But while ETFs trade like stocks, private-equity funds lock up investors’ capital for years. And ordinary investors don’t have access to deals done by private equity firms, as their funds pool capital from institutional investors and high-net worth individuals.
Private equity can be lucrative, but it’s also risky and charges higher fees than typically found in the ETF market. Deals may go wrong, while private funds are less transparent than the stock market.
Regulators worry about protecting investors, with the U.S. Securities and Exchange Commission generally restricting the masses from investing in private funds. Individuals who are accredited investors meeting certain wealth thresholds may gain access to private-equity funds.
While ordinary investors may not have access to funds raised by private equity firms, they can get exposure to the shares of such companies in the ETF market.
The Invesco Global Listed Private Equity ETF which invests in shares of listed private-equity firms such as Blackstone Inc. and KKR & Co. has gained 12.3% this year through Tuesday, according to FactSet data. Last year, the ETF plunged 38.9% in a bruising 2022 for the stock market.
The SPDR S&P 500 ETF Trust dropped 19.5% last year, and is up around 4.6% so far in 2023, FactSet data show.