KraneShares has launched an innovative ETF that applies the core return drivers of private equity buyout funds to publicly traded US equities.
Kevin Orr, Managing Director and Head of Strategic Partnerships at KraneShares.
The KraneShares Man Buyout Beta Index ETF (BUYO US) has been listed on NYSE with an expense ratio of 0.89%.
KraneShares highlights that large endowments typically allocate over 20% of their portfolios to private equity, with leading institutions like Ivy League universities investing as much as 36.7%.
However, traditional private equity investments come with high barriers to entry, including lengthy placement and lockup periods, high investment minimums, and substantial fees. BUYO aims to offer an alternative solution, delivering exposure to a strategy that mirrors private equity while maintaining the liquidity of public markets.
Methodology
BUYO tracks the Man Buyout Beta Index, which employs a systematic approach to select small to mid-cap stocks from the Russell 2500 Index. Even without filtering for private equity-like characteristics, the Russell 2500 Index has demonstrated a strong correlation (75.3% total return correlation since 2008) with the Preqin Private Equity ex-Venture Capital Index. BUYO is designed to potentially achieve an even higher correlation and emulate the return profile of traditional buyout funds over the long term.
The methodology, developed in partnership with Man Group, first targets industries favoured by private equity, such as Information Technology, Consumer Discretionary, Industrials, and Health Care. From there, it narrows down to companies that exhibit key characteristics typical of private equity targets, such as strong free cash flow yields, higher operating margins, disciplined capital expenditure, and robust revenue growth, thereby aiming to capture the potential value creation associated with private equity strategies.
Kevin Orr, Managing Director and Head of Strategic Partnerships at KraneShares, commented: “BUYO offers investors a unique way to access companies with characteristics that private equity firms find attractive but with the liquidity and transparency of an ETF. By leveraging Man Group’s research and expertise on buyout target attributes, BUYO aims to capture the potential value creation associated with private equity strategies while remaining fully invested in public equities.”
John Lidington, Co-Portfolio Manager covering liquid private equity at Man Numeric, added: “Our research indicates that many of the same methodologies that buyout funds use to target private takeover candidates can be applied to the public equity market to achieve similar results. We developed the approach underlying the Man Buyout Beta Index to provide an opportunity to harness the key return drivers powering private equity funds, which are typically expensive and have historically been difficult to access for many investors. The approach helps identify potentially undervalued companies that in many cases may become public to private takeout targets in the future.”
Jonathan Shelon, Chief Operating Officer at KraneShares, said: “We believe BUYO offers a compelling solution for various investor profiles. BUYO may be appropriate for institutional investors seeking potential liquid beta to the private equity buyout asset class while awaiting placement in traditional private equity funds. It may also be attractive to investors seeking highly correlated liquid alternative exposure to the private equity market or investors looking to diversify their portfolios by implementing a more endowment-like asset allocation that includes a healthy weighting to private equity-like strategies.”