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New Mutual Fund Specializes in Private Equity

A new, unconventional mutual fund debuted last week that will invest in the scorching-hot private equity market.

The Listed Private Equity Plus Fund launched after a four-week initial subscription period. The new niche mutual fund will invest in the global private equity sector by investing up to 80% of assets in publicly traded private equity, venture capital, and business development firms, as well as investment banks from across the world, with a much smaller percentage in the private equity funds themselves that these firms manage.

The goal is to choose the best 40 to 60 private equity securities and allow the average investor to participate in a market that has traditionally only been available to wealthy and institutional investors. According to statistics released by the fund manager, that universe of publicly listed private equity firms numbers about 200 now and could climb to 250 or more by year-end. More than half are listed on exchanges outside of the U.S., and in particular in Europe.

Private equity, as an asset class, has had great returns, said Steve Samson, chief executive officer of Vista Research and Management of Chappaqua, N.Y., the new fund's advisor. But private equity has "traditionally been the domain of institutional investors such as foundations and endowments, as well as high-net-worth investors," he said. "The investor who cannot meet the accreditation requirement has been locked out." Unlike private equity funds, the Listed Private Equity Plus Fund has a $1,000 minimum initial investment and no lock-up periods and allows the smaller investor to participate in the private equity market within a mutual fund structure.

It's no secret that private equity firms are some of the best investors in the world, with the specialists and talent and know-how to make successful changes within the firms they acquire. They then either turn all or part of their acquisitions out back to the capital markets or keep them for their own portfolios, Samson said.

Increasing numbers of public companies are turning to private equity partners to seek salvation from having to play the meet-the-quarterly-earnings-expectations game, to alleviate cumbersome Sarbanes-Oxley (SOX) requirements or to revitalize their struggling company.

"With SOX problems, it gives them one more reason to listen when private equity managers come knocking on their door," said Luke Aucoin, Vista's COO, who hails from the product sales and marketing department at Capital Research & Management of Los Angeles, the advisor to the American Funds.

Some publicly traded firms just want a partner with deeper pockets that can help them grow the way they want to. Just a few weeks ago, for example, Nuveen Investments announced it would be acquired by Chicago private equity firm Madison Dearborn Partners (see MME 6/25/07).

At the same time, private equity management firms themselves have been eagerly sticking a toe into the capital markets. All by itself, Blackstone Group's June initial public offering of just over 12% of the firm raised more than $4.1 billion, and many on Wall Street expect that more private equity firms will seek to tap the public capital markets.

Eye Toward the Future

Hoping to show that private equity can be seen as its own asset class, the Listed Private Equity Plus Fund's advisor also hopes to capture the attention of investors and their financial advisers who are also looking for a new alternative investment product.

The proof will definitely be in the pudding, said Jim Berliner, president and chief investment officer of Westmount Asset Management, an investment advisory firm in Los Angeles. "The question is going to be the degree to which the fund will be a proxy for the private equity market," he said. Also up for grabs is how this fund will behave. It's a matter of time before we see if the fund's returns will or won't be correlated to the returns of the broader equity markets, Berliner added.

Private equity firms themselves face somewhat of an uncertain future, tax-wise. In mid-June, Senators Max Baucus (D-Mont.) and Charles Grassley (R-Iowa) proposed legislation that would eliminate a tax loophole available to private equity firms. Private equity firms choosing to go public would lose tax-favored status and be required to pay higher corporate income tax rates.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.