Mutual funds are finding private equity an attractive alternative in search of higher returns. Some top names in mutual funds, such as Bill Miller’s Legg Mason Opportunity Fund and the T. Rowe Price New Horizons Fund, have good reason to believe that betting a few bucks in p.e. will keep customers happy, The Street.com reports. The U.S. Private Equity Index for the years 2001-2005 returned just about 10% annually, while the Standard & Poor’s 500, the traditional venue for mutual fund investing grew by an average of 2.61%. Mutual funds are beginning to get their feet wet in private equity through private investments in public equities (PIPEs), but it hasn’t yet resulted in a flood of investments, though mutual funds account for about 20% of the $3 billion market. “Certainly, I can see how it would be very tempting,” Todd Trubey, an analyst at Morningstar told The Street.com. “People get the sense that there’s something going on there and they want to get involved. But this remains something very rare.” The rareness may wear off, but the potential problems associated with mutual funds investing in p.e. may not. One issue is pricing. Eric Newman of TFS Capital, in an interview with The Street.com, says he wasn’t so sure private equity is “the best fit” since mutual funds have to price daily, and “you have this security that doesn’t trade on an exchange, so the market is not setting price. It’s hard to really know what its fair value is.” Then there’s the risk factor of dealing in illiquid assets – which could be tough to trade anywhere but back to a company that goes through a rough spot -- and the somewhat higher fees.
