PSP: Private Equity Investing

Powershares Listed Private Equity Portfolio (PSP) is another innovative ETF (exchange traded fund) on the street from PowerShares Capital Management, a unit of mutual-fund giant Amvescap Plc. PSP began trading on the American Stock Exchange last week. It tracks an index of 34 listed private-equity companies that primarily invest in and lend capital to privately-held firms. So, the fund provides ordinary investors access to the potentially lucrative world of start-ups, business loans and corporate buyouts -- traditionally the exclusive domain of large financial institutions and wealthy individuals.

The fund doesn't participate directly in non-listed private equity, but rather in publicly traded companies that invest in private equity themselves. Its tracking index is tilted more toward late-stage, established companies to reflect the industry and because they're less risky than pre-IPO companies with scant revenue.

Companies in the index must have a market capitalization of at least $50 million and a share price over $1. The index limits individual holdings at 10% and may include U.S.-listed ADRs of foreign corporations, but currently doesn't contain any. Inclusion in the index depends on a company's reputation, valuation of the underlying securities, management, financial qualities and historical performance. The index seeks diversification by stage of investment, sector and capitalization structure. Types of private-equity investments include leveraged buyouts and mezzanine financing. The index is rebalanced on a quarterly basis. the index's largest holding is publicly traded buyout and mezzanine fund American Capital Strategies (ACAS). The full list of companies is here. The fund has expense ratio of 0.60%.

However, for small investors it may not be a right choice of investment. The index is too narrow, which could make the fund extremely volatile and subject to significant gains and losses. Some of the companies in the tracking index are small and illiquid, which could create premiums and discounts to net asset value and drive up trading costs.