State Street Corporation, the asset manager behind the SPDR brand of exchange-traded funds, has announced the launch of the State Street Liquid Private Equity Investable Index, providing a liquid proxy for private equity investment and the basis for index-linked products such as ETFs.
Will Kinlaw, Senior Managing Director and Head of State Street Associates.
The index was conceived from research generated by State Street’s academic partnership, State Street Associates, which highlighted the superior return private equity managers have historically delivered when compared to broad equity market indices. The findings point to the managers’ ability to correctly predict the outperformance of certain economic sectors as a key driver of return.
State Street’s proprietary model uses this evidence to identify sector exposures based on the State Street GX Private Equity Index (SSPEI), a wide-reaching index covering more than 2,400 private equity funds with more than $2.2tn in capital commitments.
The index has become ‘investable’ through several channels made possible by State Street, including low cost ETFs. “We have developed versions of the Liquid Private Equity Investable Indices that gain sector exposure using sector ETFs, as well as versions that gain sector exposure using baskets of individual securities representing those sectors”, said Will Kinlaw, Senior Managing Director and Head of State Street Associates. “The sector ETFs used in the Investable Index can be selected based on cost, tracking error, liquidity, and other considerations related to best execution.”
“While the Index can’t replicate the deal-specific alpha that a top private equity manger can deliver, it can provide a liquid alternative to investors who can’t immediately deploy capital into true private equity investments.”
The Private Equity Investable Index covers a range of private equity activities including buyouts (mega, large, mid, and small), venture capital investing (early, balanced, and late stage), and private debt (distressed, mezzanine, and special lending).
Tracking assets such as ETFs will enjoy key benefits over traditional private equity exposure including: enhanced liquidity and transparency, smaller minimum investment requirements, and the removal of layered fee structures.
Investable products could also offer private equity managers with a tool to reduce the cash drag of their funds, providing an interim exposure in line with their investment profile but also sustaining liquidity to meet capital calls.
The index is currently only available for licensing in the US and Australia although plans are underway for subsequent launches in the UK, Singapore, Switzerland and Canada.