With all of the buzz and excitement building around Facebook’s IPO, it’s likely that some investors are wishing they could have gotten in on the ground floor. Private equity investments are known for incredibly lucrative returns, in addition to having more than a handful of barriers to entry. The reality is that the average investor likely misses out on a sizable chunk of profits to be made before many companies go public; such as Zynga, Groupon, Zillow, Pandora, and LinkedIn, just to name a few. Luckily, the evolution of the exchange-traded product structure has brought forth instruments capable of delivering exposure to private equity investments [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
The appeal of private equity exposure is two-fold; first and foremost, this asset class has historically been uncorrelated to broad equity markets, making it a worthy diversifying agent for any portfolio. Second, this corner of the market provides investors with a basket of opportunities that may include owning the next revolutionary internet company before it debuts on a public stock exchange.
Private Equity On A Public Exchange
UBS offers investors a way to tap into the universe of private equity investments with the E-TRACS Wells Fargo Business Development Company Index Fund (BDCS). Business Development Companies are involved in lending money to small and mid-sized companies, bearing a close resemblance to private equity firms. Also, similar to MLPs, these entities are eligible for advantageous tax treatment [see Five Commodity MLPs With Sky High Yields]. In fact, BDCs pay little to no corporate taxes as long as they pay out at least 90% of their profit and capital gains as taxable dividends. This ETN had a recent annual index yield of 9.78% [see BDCS Fact Sheet].
Perhaps the most noteworthy feature of this exchange-traded note is that it offers exposure to a previously difficult-to-reach corner of the financial market, while also generating a potentially handsome dividend yield. BDCS has amassed nearly $10 million in assets under management since launching in late April of 2011. This ETN tracks an index that is designed to measure the performance of 26 Business Development Companies that are listed on the New York Stock Exchange or NASDAQ. Top holdings include lesser-known Financial Equities, such as Ares Capital, Apollo Investment, BlackRock Kelso Capital, and Main Street Capital. Although the total number of holdings may seem shallow, investors should remember that each of these companies holds a portfolio of component investments, effectively offering exposure to more than 1,000 privately held companies through a single ticker.
Like all ETNs, BDCS exposes investors to the credit risk of the issuing institution, in this case UBS. Those who are looking to make a leveraged bet on this corner of the market may opt for BDCL; this ETN offers 2x monthly leveraged exposure to the same index as BDCS.
Disclosure: No positions at time of writing.