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Among many retail investors, private equity is a highly sought after asset class. It’s also one that’s long been difficult to access due to steep required minimum investments, among other reasons.
Thank exchange traded funds for democratizing private equity access so that a broader investor audience can join the party. One of the ETFs in this category is the WHITEWOLF Publicly Listed Private Equity ETF (LBO), which turns a year old next month.
For now, White Wolf is a one-fund, independent ETF issuer, but the firm’s private equity experience spans well over a decade. With LBO, the issuer provides investors with exposure to a broad basket of private credit/equity firms. The desired outcomes are straight forward: income generation and long-term capital appreciation.
Clients always want the latter, but they may not be aware many listed private credit/equity instruments are high-yielding assets. For example, the common shares of Ares Capital (NASDAQ: ARCC) – LBO’s second-largest holding –yield 9.09%.
LBO Could Benefit from Lower Interest Rates
A good portion of LBO’s income proposition is sourced via business development companies (BDCs), of which Ares Capital is one. That’s a potentially attractive at time when the Federal Reserve is expected to continue lowering interest rates because BDCs are a rate-sensitive asset class.
In simple terms, BDCs provide various forms of financing to small and middle market firms that are often avoided or overlooked by traditional lenders – a scenario that gets worse when interest rates tighten. Private credit, including BDCs, can fill that void.
To be sure, LBO’s roster isn’t solely dependent on BDCs and the fund is actively managed so White Wolf can adjust BDC exposure as it sees fit. Still, the ETF has the potential to benefit from Fed easing.
“We define Leverage Finance Providers as Business Development Companies (BDCs), finance companies, and direct lenders (excluding banks),” according to the issuer. “BDCs are considered specialty finance companies and primarily make investments in the debt and/or equity of small to mid-size companies predominantly in the U.S. We define Buyout Firms, Sponsors, and Asset Managers as leading publicly traded private equity companies, publicly traded asset managers that invest in private equity sponsors, and other vehicles whose principal business is to invest in or lend capital to privately held companies.”
LBO Could Be a Diversifier
LBO’s income-generating potential and access to a previously hard-to-reach asset class are compelling traits. So is private equity’s status as an alternative class.
That’s noteworthy to advisors for a couple of reasons. First, an array of studies and surveys indicate affluent and younger clients want more exposure to alts.
Second, alts when added to a 60/40 portfolio (usually at the expense of the fixed income sleeve) can enhance long-term returns while reducing volatility and increasing overall portfolio diversification. Clients are sure to like all of that.
Related: Retirement Plan Participants Want Private Equity Access