Author's note: This article was released to CEF/ETF Income Laboratory members on November 9th, 2021.
The Invesco Global Listed Private Equity Portfolio ETF (NYSEARCA:PSP) is a private equity index ETF. The fund's diversified holdings, strong, growing 7.5% dividend yield, and industry-beating returns make it a buy. Due to the fund's niche, risky holdings, a small position size is ideal.
PSP is quite similar to the ProShares Global Listed Private Equity ETF (PEX), previously covered here, with a couple small differences. PEX invests quite heavily in BDCs and has a stronger 9.7% dividend yield, while PSP invests more heavily in more traditional private equity companies, and has stronger dividend growth, capital gains, and total returns when compared to PEX. PSP seems like the broadly stronger investment opportunity, in my opinion at least.
PSP - Basics
- Sponsor: Invesco
- Underlying Index: Red Rocks Global Listed Private Equity Index\
- Dividend Yield: 7.5%
- Fund Management Fee: 0.5%
- Total Returns CAGR 10Y: 14.4%
PSP - Investment Thesis
PSP is a relatively straightforward private equity index ETF. The fund's investment thesis rests on its:
- Diversified holdings, with exposure to thousands of private companies from all relevant industries
- Strong, growing 7.5% dividend yield, which makes the fund a perfect choice for income investors and retirees
- Industry-beating returns, with the fund consistently outperforming its peers
The above combine to create a strong investment opportunity, and make PSP a buy. Let's have a look at each of these three points.
PSP is an index ETF, tracking the Red Rocks Global Listed Private Equity Index, a private equity index. The index focuses on traditional private equity companies, which make direct equity investments in private companies. The average private equity company invests a couple hundred million dollars in the equity of a mid-size private company. Funds are used fund growth projects, and the private equity partner provides operational / strategic support to boost the company's financials and growth rate. As an example, KKR (KKR), the fund's largest holding, describes their investment approach as such:
(Source: KKR Corporate Website)
Private equity deals are generally leveraged, with the private equity company internally funding a portion of the deal, and going into debt for the rest. Leverage boosts returns for private equity companies, but also risks.
PSP's index also includes smaller investments in companies making loans to private companies, generally referred to as business development companies or BDCs, and companies providing services to private equity companies. Allocations are as follows:
(Source: PSP Corporate Website)
PSP provides investors with diversification in two key ways.
First, it provides investors with indirect exposure to private companies, a relatively rare asset class. Look through KKR's portfolio, and you'll see a lot of smaller private companies, the vast majority of which are closed to retail investors, including ByteDance (developers of TikTok) and Epic Games (developers of Fortnite), among others. Investing in PSP provides investors with indirect exposure to these and other private companies, an important, and uncommon, source of portfolio diversification.
Second, PSP's holdings themselves are quite diversified, with the fund providing exposure to all relevant industry segments and regional markets. The fund focuses on North America and Europe, due to the size of their economies and corporate markets, and is overweight the consumer discretionary sector.
(Source: PSP Corporate Website)
PSP's holdings consist of 31 private equity companies, which provide investors with indirect exposure to over 1000 private companies. Indirectly, the fund is as diversified as most broad-based equity index funds, including S&P 500 index funds, or the Vanguard Total World Stock ETF (VT).
PSP's diversified holdings reduce portfolio risk and volatility, and are a significant benefit for the fund and its shareholders.
Strong, growing 7.5% dividend yield
Private equity companies tend to have very strong dividend yields, as private equity deals are generally explicitly structured so as to ensure that this is the case. The most common way this is done is through implementing / enforcing dividend recapitalization schemes. In simple terms, the private equity company invests in a private company, with the funds being used to fund growth projects and similar initiatives. A few years later, the private company pays back their private equity partner with debt-financed dividend payments. These deals tend to be very controversial, debt-financed dividend payments are an extremely aggressive form of financial engineering, but are quite common in these markets.
PEX's private equity focus boosts the fund's dividend yield to 7.5%. It is a very strong dividend yield on absolute terms, and much higher than that of most relevant broad-based equity index funds and financial industry equity index funds.
On the other hand, the fund's dividend yield is about the same as that of BDCs, and slightly lower than that of PEX, its closest peer:
PSP's yield is quite strong, and has seen outstanding growth since inception, and for most relevant time periods. Growth is quite volatile, and so estimating (material) growth rates is quite difficult, but double-digit annual growth rates are about average.
(Source: Seeking Alpha)
PSP offers investors a 7.5% dividend yield and double-digit annual dividend growth rates, an extremely strong combination. The fund's characteristics are particularly appropriate for long-term dividend growth investors, who should see rapidly increasing, double-digit yield on cost figures by investing in PSP. That has been the case in the past, with the fund boasting a 1Y yield on cost of 10-11%, a very strong figure. Long-term yield on cost figures are even stronger, with the fund boasting a 10Y yield on cost of 14.3%. Growth has been quite strong but, as mentioned previously, quite volatile.
(Source: Seeking Alpha)
On a more negative note, the fund's dividend is quite lumpy, and sees large fluctuations every quarter.
This is because private equity companies themselves have lumpy dividends, as these are strongly dependent on the specifics of each private equity deal and investment. As an example, several private equity companies decided to hold (not sell) their investments throughout 2020, due to market volatility. This caused a drop in the fund's dividends during mid-2020, which can be seen above. Specific investment decisions taken by each of PSP's underlying holdings can have material effects on the fund's dividend, hence its large quarterly fluctuations. These make it difficult to analyze or forecast the fund's dividends, but as results have been overwhelmingly positive so far, I'm confident that the fund offers investors a strong, growing dividend.
Strong dividend yields sometimes come at the expense of capital gains or total shareholder returns, but that is not the case for PSP. The fund has outperformed all of its peers since inception, and for most relevant time periods. On the other hand, returns have lagged these past twelve months. Still, the fund's overall performance has been great.
(Source: Seeking Alpha)
PSP's dividends are responsible for about 2/3 of the fund's total returns, with the other 1/3 being due to capital gains / rising share prices. PSP's share price has risen by 101% these past ten years, equivalent to a 7.8% CAGR.
Extremely few funds offer investors the strong yields, dividend growth, capital gains, and total returns that PSP does, making the fund an outstanding, well-rounded investment opportunity.
On the other hand, I'm somewhat wary of what PSP's skyrocketing share price means for future shareholders. As can be seen above, PSP currently trades at a 40% higher price than it did from 2014 to 2020. A much higher share price could indicate a rising valuation, which might spell trouble for the fund's future shareholders, but this does not seem to be the case. From what I've seen, PSP's underlying holdings have all seen strong revenue, earnings, and cash-flow growth since 2020, and their skyrocketing share price is simply a reflection of that. The following table includes select financial information for some of PSP's largest holdings:
PSP's rising share price is the result of the strong financial performance of its underlying holdings, and not of rising valuations or bullish market sentiment. As such, I'm not overly concerned about the fund's rapidly rising share price.
Conclusion - Buy
PSP's diversified holdings, strong, growing 7.5% dividend yield, and industry-beating returns make it a buy.
Profitable CEF and ETF income and arbitrage ideas
At the CEF/ETF Income Laboratory, we manage ~8%-yielding closed-end fund (CEF) and exchange-traded fund (ETF) portfolios to make income investing easy for you. Check out what our members have to say about our service.
To see all that our exclusive membership has to offer, sign up for a free trial by clicking on the button below!
It is a very strong dividend yield on absolute terms, and much higher than that of most relevant broad-based equity index funds and financial industry equity index funds. PSP's yield is quite strong, and has seen outstanding growth since inception, and for most relevant time periods.
The 11.0% annualized return for private equity for the entire 21-year period is impressive compared to the 6.9% annualized return for the Public Stock Benchmark and the resulting 4.1% annualized return difference exceeds the 3% annual premium or excess return generally associated with return objectives for private ...
Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020. Between 2000 and 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital. When compared over other time frames, however, private equity returns can be less impressive.
PSP Partners is a global private investment firm founded by our Chairman, Penny Pritzker. PSP Partners takes a long-term, fundamental approach to investing in private businesses and real estate with those who share our core values of integrity, passion, discretion and candor.
Private equity involves investing in businesses or funds not listed on public stock exchanges. Private equity investments offer high returns, but are illiquid and have high minimums. Traditional private equity is only open to the wealthy, but newer forms are available to smaller investors.
Looking at bottom-quartile funds, he found that 75 percent had failure rates of 35 percent or higher. The average is around 27 percent for buyout firms.
Unlike direct investments in non-listed companies, you leave it to the Private Equity fund to create value. Private Equity is a key catalyst for economic development. It boosts corporate growth and job creations and helps new generations of business leaders emerge.
Private equity investments are available only to high net worth and institutional investors, whereas investors of all types can own public equity. Private equity can generate greater returns, but comes with unique risks, including illiquidity, high management fees, and long holding periods.
From 1990 to 2010, private equity firms outperformed the S&P by 6.3%, net of fees. However, according to the American Investment Council, in the decade preceding September 2020, private equity funds generated a 14.2% median annualized return compared to annualized return of 13.7% for the S&P 500.
RVPI = NAV / LP Capital called - Distribution to paid-in (DPI) represents the amount of capital returned to investors divided by a fund's capital calls at the valuation date. DPI reflects the realized, cash-on- cash returns generated by its investments at the valuation date.
Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.
The Top Ten public sector pension funds include (ranked by size of pension assets): The Canada Pension Plan Investment Board (CPPIB), The Caisse de dépôt et placement du Québec (Caisse), The Ontario Teachers' Pension Plan Board (OTPP), The British Columbia Investment Management Corporation (bcIMC), The Public Sector ...
Is PSP Investments a good company to work for? PSP Investments has an overall rating of 4.0 out of 5, based on over 190 reviews left anonymously by employees. 88% of employees would recommend working at PSP Investments to a friend and 73% have a positive outlook for the business.
PSP Investments' head office is located in Ottawa, Ontario, and its chief business office is located in Montreal, Quebec. It also has offices in New York City, London and Hong Kong.
Private equity refers to the debts and shares of companies that are not publicly traded on a stock exchange. The term may also refer to venture capital that is invested in newly started businesses, known as startups.
By contrast, private equity firms make money by exiting their investments. They try to sell the companies at a much higher price than what they paid for them. The profits are then divided up based on a distribution waterfall.
For the vast majority of private equity associates, the base salary is around $135k-$155k. Then, based on fund performance, bonuses tend to range from 100% to 150% of the base salary.
Buying a PSP in 2021, Is It Worth It? - YouTube
As of October 19th, 2020 : You will no longer be able to purchase PS3, PSP and PS Vita content, themes or avatars on our Web or Mobile Store. However, you can still purchase PS3, PSP or PS Vita content on their respective devices.
PSP was widely considered a portable media player on top of its gaming functions. Unfortunately, PSP is an outdated device. It could not compete in performance against Nintendo Switch. With that, Sony decided to discontinue the online market and support for the device officially.
Along with Sony's PlayStation Plus announcement today, the Japanese giant has also confirmed that PSP & PS One games will be making more of a comeback than we initially thought.
There's no reason to buy a psp in 2021 (for gaming). It is, however, totally worth it downloading PPSSPP onto your phone and playing the PSP library of great games that are available on the console.
This system can play games, movies, music and pictures all through a Memory Stick Duo (The PSP will also accept Memory Stick Pro Duo)or UMD. UMD is the PSP's disk system that can hold up to 1.8GB's. Stands for Universal Media Disk.
Many PSP owners were left with no way to digitize their library other than rebuying the games through Sony all over again. This made the PSP Go more of a downgrade for some owners, while the steep price and five-year-old tech made it a hard sell for those who've never owned a PSP before.
Despite its popularity, many complained about the low battery life and the device began to lose its following when the PlayStation Vita was released in 2011. Sony has said that one of the reasonings for the PSP's discontinuance is so that they may focus more its successor.
There are five versions of the PlayStation Portable, the PSP-1000 (also known as "PSP fat"), PSP-2000 ("slim and light" edition, a lighter version of the original PSP), PSP-3000 ("bright and light" edition, that includes a built in microphone and improved LCD), PSP-N1000 (or PSP Go, with a sliding screen design, ...
PSP, also known as Steele-Richardson-Olszewski syndrome, is an uncommon but not rare parkinsonian syndrome. Characteristic features of PSP and its variants include vertical supranuclear gaze palsy, postural instability with unexplained falls, akinesia, and cognitive dysfunction.
Several models of the console were released, before the PSP line was succeeded by the PlayStation Vita, released in Japan in 2011 and worldwide a year later.
The PSP-3000 was released in 2008, following closely after the PSP-2000. It brought a brighter screen, earning it the nickname "PSP Brite," and a slightly better battery. It is generally considered the best of the PSP models overall, though if you're looking for homebrew capability, the PSP-1000 is still superior.
The PSP go, also known by its codename PSP-N1000, is a revision of the PlayStation Portable. This model was released on 1 October 2009 in North America and Europe, and the following month in Japan. It was discontinued outside of North America in 2011, and two years later in 2013 in North America.
Sony's bold, discless PSP might have been a sales disaster, but it's still one of the best handheld consoles ever made. 12 years ago, people were not ready for an entirely digital games console—but Sony went ahead and made one anyway.
The system was released in Japan on December 12, 2004, in North America on March 24, 2005, and in the PAL region on September 1, 2005. The PSP is the only handheld video game console to use an optical disc format, Universal Media Disc (UMD), as its primary storage medium.