Transcript

Hi, I'm Kevin Orr and I head up Strategic Partnerships at KraneShares. We're here today to discuss the KraneShares Man Buyout Beta Index ETF, ticker symbol B-U-Y-O.

KraneShares has partnered with one of the preeminent global alternative managers, Man Group, in designing and delivering this strategy. The BUYO ETF could be a good proxy for the returns of traditional buyout funds. And who better to describe the mechanics of this strategy than John Lidington of Man Group.

Man Group: Centuries of Experience

Hi, I'm John Lidington, Portfolio Manager at Man Group focused on liquid private equity. Headquartered London, Man Group has a deep, rich history, having actually been founded back in 1783. But, if we fast-forward to today, we are known as an alternative investment management firm with a number of different offerings across hedge funds and across more traditional asset classes, and we're really focused on the pursuit of alpha for our clients.

Private Equity: Draws and Drawbacks

Private equity has been very popular with investors for years now, primarily because of the strong historical returns that the asset class has generated, and in addition, the potential diversification that private assets can bring to a portfolio.* But there are drawbacks. And those drawbacks include the high fees that investors need to pay to access the private equity asset class. In addition, it takes a long time to deploy capital that investors commit to funds. The asset class is inherently illiquid and involves very long lockups. And going hand in hand with that is just the cyclicality in distributions.

Can Strategic Public Investment Match Private Equity (PE) Returns?

Given that private equity has outperformed public equities for many years, we're often asked the question whether it's even possible to use public equities to match the performance of private equity. As quants, we firmly believe that a systematic approach can be taken to matching private equity’s returns using publicly listed companies. The same fundamentals that attract buyout firms to private companies also exist in many cases in public companies.

For starters, you have sectors that are heavily targeted by private equity investors. These include Technology, Industrials, Health Care, all of which have significant representation in the public markets as well, and are sectors that we can target in our portfolio. In addition, there are the bottom-up characteristics of the companies that PE finds attractive and which we can also mimic in a public equity portfolio. These characteristics include smaller companies, undervalued companies, more profitable companies with more disciplined cash management, as well as certain growth rates and the ability to take on debt in a deal.

Looking at a simple total return correlation, we find that there's a 75% correlation between private equity and public equity when you use Preqin as the proxy for private equity and the Russell 2500 Index as the proxy for public equity.

Constructing the Man Buyout Beta Index

To arrive at the final portfolio of public companies that resemble the characteristics of private equity companies we have a three-step process. We start with the Russell 2500 Index as our initial selection universe. From there, we tilt the industry profile of our portfolio to match the industry profile of private equity. And as a final step, we avoid companies that to us are obviously non-PE-type stocks that are contained within a broader public market index. In reality, there are a lot of public companies that look nothing like the companies you're going to find in a private equity portfolio. Our goal is to make sure those companies are eliminated from our portfolio.

How Can BUYO Fit in Your Portfolio?

This strategy can be used in multiple different ways in your portfolio. One popular use case is for investors who have committed capital to a private equity fund and are waiting for that capital to be called, and while they're waiting, want exposure to PE-like return drivers. Another common use case is investors who are looking for an investment that is highly correlated with traditional private equity, but has greater liquidity and a significantly lower fee.**

It's commonly known that the cornerstone of endowment investment portfolios is private equity. Our strategy can serve as a building block for any investor who's looking to implement an endowment-like asset allocation.

We take a multifaceted approach to creating an investable beta for buyout funds. Our approach is fully systematic, it's disciplined, and it's focused on the fundamentals of businesses that PE managers care the most about. What we're seeking to do is provide investors with exposure to private equity return drivers without needing to pay private equity’s fees.

To learn more about the KraneShares Man Buyout Beta Index ETF (BUYO) and other KraneShares ETFs, visit www.KraneShares.com.

Thanks for watching.

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*Diversification does not ensure a profit or guarantee against a loss.

**Buying and selling shares of BUYO can result in brokerage commissions.

For BUYO standard performance, top 10 holdings, risks, and other fund information, please click here.

This material contains the speakers' opinions. It should not be regarded as investment advice or a recommendation of specific securities.