State Street Associates (SSA), the academic affiliate of State Street, is creating a new version of its liquid index to mirror the median returns from private equity deals.
Called the Liquid Private Equity Investable Index, it will be launched by the end of March.
The index aims to address the issues of access to private equity deals and returns from the asset class faced by high-net-worth individuals (HNWIs).
'Most private banks will have a limited opportunity set to invest in private equity to begin with,' Daniel Gerard, head of Apac advisory solutions told Citywire Asia.
'When you do get that, it comes with illiquidity and a fee structure that will hit returns in ways that are unknown now.
‘If you are a private banking client or a HNWI, and in a relationship with a bank that was able to get you access, it might still be 3-5 years before your money was deployed into a deal. What do you do in the meantime?'
The index, which is rebalanced quarterly and offers daily liquidity, will use 100-150 public stocks to mimic the sector exposure of private equity managers.
Currently it tracks US buyout deals because of the availability and size of the dataset, but is looking to capture the performance of global venture capital and infrastructure private equity funds as well in the future.
Gerard said research showed that PE managers tend to focus on deals in the same sectors at the same time.
‘We have found that this incidental sector selection explains much of the asset class alpha, in addition to illiquidity premium and manager specific premium.'
SSA is already working with global private banks with a presence in Asia to create index funds and other products based on the index.
Hypothetical back test data revealed that the annualised returns of the index would be 9.32% between January 2002 and December 2017.
This will be the second version of State Street’s private equity index, which was initially based on sector ETFs on the US equity market.
‘Stock selection allows for more tailoring. So, for example, we use the cash flow filtering so you can find companies that have stable cash flow, so it looks more like a company that a PE manager would buy,’ Gerard concluded.