Private equity (PE) has been a topic of interest for investors looking to diversify their portfolios beyond traditional markets like the S&P 500. Historically, accessing private equity investments required either being an institutional investor or achieving a high net worth to qualify as an accredited investor. While many individuals might feel discouraged by these barriers, there are alternative pathways for retail investors to gain exposure to private equity.
One notable route is through exchange-traded funds (ETFs), such as the Invesco Global Listed Private Equity ETF (PSP). This fund holds shares of publicly traded private equity firms like Blackstone and KKR, allowing investors to benefit from the growth of the private equity sector without the high entry costs typically associated with direct investments. Over the past decade, PSP has shown a respectable annualized return of 9.1%, although its recent performance has been slightly sluggish, reflecting a broader market correction following the overvaluation observed in 2021. However, as of 2024, private equity markets are on the upswing, with year-to-date returns surpassing 25%, suggesting that now might be a strategic time for potential investors.
For those looking for higher yields, particularly in a market that remains volatile, investing in closed-end funds (CEFs) with significant private equity portfolios may be a prudent strategy. These funds often provide larger income distributions compared to standard ETFs. Two prominent CEFs worthy of consideration are the BlackRock Innovation and Growth Term Trust (BIGZ) and the BlackRock Science and Technology Term Trust (BSTZ). Currently, BIGZ offers a yield of 13%, with around 25% of its assets in private equity, whereas BSTZ, which has closer to one-third of its investments in private equity, yields 12.1%. These funds mainly focus on technology companies, ensuring diversification within their holdings and exposure to the private equity market via their operational connections with private firms.
Despite challenges, both BIGZ and BSTZ have shown promise in recovering from the downturn experienced in 2022. However, the performance of their private equity investments has differed substantially. BIGZ has experienced an average decline of 44.1% in its private equity investments since its inception, leading it to trade at a significant discount of 10.2% to its net asset value (NAV). In contrast, BSTZ has reported a positive return of 30.9% on its private equity investments dating back further to late 2019, which helps explain its narrower NAV discount of 7.3%. This disparity highlights the varying management competencies and performance trajectories within the private equity space.
Moreover, the investment strategy employed by these funds plays a critical role in their overall financial health. BSTZ’s performance has improved as the private equity market continues to recover, thus allowing it to outperform PSP recently. The ability to generate steady income through dividends is essential in the context of private equity volatility, thinking long-term for a diversified portfolio. Income derived from these investments provides more options, whether to reinvest in private equity when prices are favorable or to diversify into other asset classes.
In conclusion, while traditional avenues for private equity investment may be limited for most individuals, various alternative strategies, particularly through ETFs and closed-end funds, are accessible. The current market conditions present an opportune moment for investing in private equity, especially with promising instruments like BSTZ offering an appealing combination of income yield and growth potential. Consequently, informed investors who consider these factors might discover avenues for enhancing both their portfolio diversification and income generation, fostering financial independence while navigating the ever-evolving landscape of private equity.